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Opinion

Market Correction Will Spark Advisor Movement

July 2, 2015

It’s hunting season on Wall Street. Branch managers and recruiters realize that when markets are volatile, advisors are more receptive to recruiting pitches.

Despite a high-flying stock market in which the Dow Jones Industrial Average hovers daily somewhere around 18,000, there’s a palpable feeling of anxiety among many investors and financial advisors.

And yet, every cloud has a silver lining. Savvy branch managers and advisor recruiters who’ve been through a couple of market cycles recognize an opportunity when they see one. They know that a short, sudden drop in the market will dramatically boost the number of advisors who jump ship. That’s because advisors are much tougher to dislodge from their firms during roaring bull markets. They are much more likely to be complacent and happy where they are, when markets are performing well and clients are happy. Even the potential to cut stratospheric recruiting deals with rival firms won’t dissuade many from staying with their firms.

A sudden market correction changes all that. It’s ironic that people who give advice to others on planning for lean times often don’t take their own advice. Yet, some advisors are understandably reluctant to make a change when things are going well. Success is hard to interrupt. In difficult periods, an advisor’s own production is likely to weaken. Some advisors may feel that their franchise is not quite as robust as before. Clients with underperforming portfolios may become less satisfied with their advisor relationship and more open to changing advisors.

Franchise Value

An advisor’s trailing 12 months’ gross commissions represent the value of an advisor’s franchise to prospective firms. The “trailing 12” is the stock price of an advisor’s practice. It determines the size of the recruiting package that competing firms will offer. The trailing 12 also represents for many advisors how they themselves gauge the worth of their own practice. Better to sell high early on when the correction begins than to cut a deal some months out, after difficult markets have pummeled an advisor’s gross and strained relationships. Dissatisfied clients are harder to transport to a new firm.

Hiring firms are aware of how advisors think. They are typically laser focused on maximizing their recruiting efforts once a correction begins. Their recruiting efforts are also defensive, in part. Firms understand that they are vulnerable to having some of their own advisors leave and take deals elsewhere.

Of course, a prolonged and severe downturn like the 2008 crash or the period after 2011 is another matter entirely. As the bear market sinks in, advisor movement slows dramatically. More advisors doubt their ability to move their businesses — and with their gross production in the doldrums, the same level of financial reward for making the move just isn’t there.

A market correction is coming at some point. When it arrives, don’t be surprised to see lots of advisor job-hopping on Wall Street.