Rising Loan Levels Reflect Big Recruiting Push At Stifel, LPL
February 26, 2020
By Mrinalini Krishna
Big jumps in advisor loans reported by Stifel Financial and LPL Financial reflect concentrated recruiting efforts at those shops that can set the tone across the industry, recruiters and company executives say.
Stifel, for its part, issued $213.2 million in up-front transition support loans to advisors who joined its ranks last year, recent filings show. That level represents a 77% surge compared to 2018 and the most the firm has extended since 2015, when it logged $240.8 million in advisor loans issued.
At that time, nearly three-quarters of the total, or $174.8 million, went to “associates of acquired companies for retention,” the firm’s 2015 annual report indicates. Stifel acquired 1919 Investment Counsel in 2014 and a year later picked up Sterne Agee and Barclays’ U.S. wealth and investment unit.
At LPL last year, the total balance of all forgivable loans held by advisors jumped 44.8% over the previous year to $338 million. That figure, however, includes balances carried over from prior years, as the firm does not break out the amount of new loans extended each year.
Comparing balances between firms can be tricky, since each tends to report these deals in different ways, but a spike in the amount of money shops lend to advisors to help them set up shop broadly indicate each company’s recruitment trajectory.
Firms with big bumps in transition loan balances tend to be those seeing the greatest recruiting success, and can set the pace for competitors’ offers.
“Firms that couldn’t compete with them had a really difficult recruiting year,” in 2019, says Jodie Papike, president at recruitment firm Cross-Search.
Stifel’s ‘ultra competitive’ approach
Stifel’s loans are based on the joining FA’s trailing 12-month production and are forgivable over a five- to 10-year period.
Last year was a strong recruiting year for the St. Louis-based broker-dealer. The firm added 150 advisors with nearly $119 million in annual production and more than $17 billion in client assets, CEO Ronald Kruszewski told analysts during the most recent earnings call. That sum includes 45 advisors with $36 million in annual production in the fourth quarter alone.
John Pierce, Stifel’s former head of recruitment, previously described the firm’s compensation package and transition deal as “ultra-competitive” and “probably top on the street.” FAs joining Stifel get equity, are paid based on a competitive grid, and, depending on the size of practice they bring, collect cash upfront, he noted. Stifel also has less stringent back-end hurdles compared other broker-dealers, he said.
“A lot of our competitors make you jump through fiery hoops to earn their back-ends,” Pierce told FA-IQ in December. “We don’t do that.”
Pierce left the firm earlier this month. Stifel did not respond to queries about the impact of Pierce’s departure or a potential change in recruitment strategy once his garden leave ends in May.
The increase in Stifel’s loan numbers is likely a result of the growing number of advisors they are hiring rather, not a signal that the firm is cutting bigger checks per deal, says Louis Diamond, executive vice president and senior consultant with Diamond Consultants.
And he expects the momentum to continue.
“I would probably predict that they will continue to have similar success, which means I’d say a consistent or even a slight increase in how much they outline for transition money because their business model is still in high demand,” he says.
LPL dictates street deals
LPL’s loans are forgivable for up to 10 years provided the FA remains licensed with the firm.
“LPL has a reputation for being one of the higher-paying firms,” says Diamond, giving the example of a 50-basis point deal offered last year.
When the firm steps up its offer, whether in public or in private conversations with individual prospects, “it puts pressure on most other broker-dealers to either increase their deal or just do things to make their firm more attractive,” he says.
LPL does not explicitly break out how much of the $338 million in loans on its books went to new recruits in 2019, but managing director Rich Steinmeier, the firm’s recruiting chief, says that the firm has no intention to back down in pursuit of top talent.
“We will continue to be aggressive as we have been in the marketplace. We don’t think we have to win through transition assistance but we certainly recognize that there was a transition event and there’s a disruption that occurs to advisors and their practices, and they need to be compensated for that,” says Steinmeier.
Are high transition loans sustainable?
2019 was a “high bar” for IBDs in terms of transition loans, says Jon Henschen of Henschen and Associates, who works with independent broker-dealers. This year, he notes, “amounts have toned down with 40% becoming the top-end norm.”
But Diamond is more skeptical.
“There’s more competition than ever,” he says. “And the way to attract that talent is to have a recruitment deal or transition loan that is going to be equivalent to or stronger than your competition,” he says.
But big loans can also bring risks. For advisors, meeting back-end hurdles on lucrative transition deals can be a challenge. Firms, meanwhile, risk making big offers on teams that don’t work out as planned.
High transition notes can also indicate that an independent broker-dealer has fewer resources available for tech improvements, says Henschen. Such offers can also draw out the break-even timeline broker dealers face to seven years or more.
“The other problem with highest-bidder advisors is when the note period ends, they will leave for another highest-bidder note,” Henschen adds.
