Why IBDs Are Changing Their Recruiting Deals

What is driving this shift? "It is the ever-increasing amount of fee-based business being done," according to Henschen.

"Before, when a percentage was paid on total production, irrespective of what the product mix was, you could have the same amount paid on a book that was all mutual funds and variable annuities held direct versus a much more profitable book for the broker-dealer that is primarily advisory assets," he explained.

"We've been seeing larger broker-dealers pushing platforms for attracting wirehouse advisors," he added. "These platforms provide most everything for an office except staff but for that, they get lower payouts than a standard independent advisor would receive.

"Further enticement for attracting this model is note amounts over 100% of trailing 12 or higher upfront and backend amounts offered with the backend bonus based on assets brought over. With these larger amounts being offered, you also have a longer commitment of nine years before the notes are forgiven versus the typical forgiveness period of five to seven years.

"IBDs love this model because wirehouse advisors hold all their assets in brokerage accounts, and they have substantial advisory assets, which are both highly sought after."

Another plus: "The broker-dealer makes at least twice the profit on this office-supplied model than they do with the standard independent reps that have their own office," he said.

Henschen, meanwhile, likes the basis-points formula for incentive deals because it's based on AUM, he said. "For those that aren't churning, they're rewarded with more transition money because it's based on assets under management," he noted.

However, on the other hand, "if you have somebody that doesn't have a lot of assets but is generating a lot of revenue off those assets — you can call it churning or doing high-commission products — they would benefit less from that model of paying on assets under management," he explained.

"So I think it's a way of paying that rewards ethics and pays less for those that have a propensity to churn and make more off a smaller amount of assets," he added.

Staying Competitive

The shift by Commonwealth, Diamond said, "makes sense for a few reasons."

First, "Commonwealth and many other IBDs charge an advisor an administrative or platform fee that calculated as basis points on assets. So offering a recruitment deal that aligns with how they charge advisors seems to make sense.

"We've also seen a shift within Commonwealth and some of their peers to charge advisors a flat fee (based on basis points on assets) which would bundle the traditional grid payout (ie: 90% payout), trading costs, platform fees, and additional services associated with starting up the business. So once again, this shift in how they write recruitment deals jibes with this new approach."

Second, "practices are much more advisory heavy so this rewards fee-based practices."

Third, Commonwealth's biggest competitors are often RIA custodians who offer "business development dollars" or startup funds to offset a transitioning advisor's expenses during the transition.

Finally, it "helps them compete with how LPL and other BDs are structuring deals."

Pictured: Commonwealth CEO Wayne Bloom