If you are an advisor considering a change in affiliation, you have likely observed the efforts some firms are making to attract talent. One such effort involves offering significant upfront money. Upfront money is different from transitional money. Transitional money can make sense for a variety of reasons when making a change, but accepting upfront money is a long-term commitment that can come with many strings attached to it. While it may appear very attractive, there are many factors to consider before entering this sort of relationship.
Ten questions every financial advisor should answer before entering a contract with upfront money:
1. How long are you locked into the contract?
It is important to consider how independent you truly are if locked into a contract for 3-5 years or longer. Flexibility is important to consider. At Fragasso Financial Advisors, an at-will agreement only requiring a 2-month notice is offered.
2. How will the upfront money impact you from a tax perspective?
The upfront money an advisor receives to change affiliation can be considered compensation, and big lump-sum payments can considerably affect your tax situation. You may be better off to earn this money through your efforts in an evergreen state.
3. Will this relationship offer you a full range of solutions?
When locked into a contract with upfront money, you may not have the flexibility to consider all options. If you are independent, you have the ability to find these solutions. As an example, at Fragasso Financial Advisors you can retain your full independence and flexibility, which includes the highest payouts and no proprietary products. Such an arrangement includes access to a full range of solutions, including:
• In-house Portfolio Management
• Client Experience
• Financial Planning
• Operations and Compliance
• Leading Technology Platforms
• Financial Education and Seminars
• Retirement Plans
• Corporate Offerings
• Business Consulting
4. What may happen in the event of a potential sale or a succession planning event over the term of your relationship?
Upfront money may not allow you to monetize from a sale or succession planning perspective if you are still under the covenants of a contract. It is important to consider your long-term planning before entering into any agreements.
5. How will upfront money impact your motivation?
With a large infusion of cash, will that lessen your motivation and lull you into a lazy mindset that will keep you from growing your business?
6. Does the firm’s philosophy lean too heavily on recruiting new advisors with upfront money?
If so, you could be disappointed with the capital they are using to serve the firm’s existing advisors through their platform. There may not be the balance needed to truly serve their advisors and provide opportunities for growth and success.
7. Will you be tied into using proprietary products?
If proprietary products are included in the package, it may impact your compensation structure. It can also lessen your independence and potential opportunities.
8. Have you educated yourself on restrictive covenants?
It is important to understand how this can impact you and your clients. You must fully understand any restrictive covenants prior to acceptance.
9. Will this move subject your clients to new fees?
It is very important to understand the impact of fees on your clients. When Fragasso Financial Advisors made our decision to move in 2018, we saved our clients over $500,000 in nuisance fees.
10. From a fiduciary standpoint, is this move in the best interests for both you and your clients?
Your clients should be at the forefront of your consideration. This mindset fits the culture we have here at Fragasso Financial Advisors. If the move is not a win-win for both you and your clients, are you truly making the right move?
We will explore these items in greater detail in future blogs. As you can see, there are many items to consider to ensure you are making the best decision for you and your clients. By accepting significant upfront money, will you be better off long-term? Only you can answer that question.