(Part 1)

Signing Bonus

A signing bonus is a payment made in consideration of client assets to be / having been transferred over to the incoming dealer. It is typically expressed as a multiple of gross revenues, aka ‘trailing 12’. 

Starting with an initial payment on the date of registration, signing bonuses are paid in stages as/when assets are transferred in. Each stage/tranche is based on meeting certain asset hurdles. The hurdle amounts are usually negotiated between both parties.

A signing bonus is one major part of the overall free agency contract. All the conditions (including the sign bonus itself) carry certain time frames and term limits. Although most contracts carry 5- or 7-year terms, most of the financial conditions / riders are valid for a 24–30-month period. After this time, the conditions expire. 

Finally, all signing bonuses are structured as a forgivable loan. These deals are usually based on five- or seven-year terms. Once the term has expired, the loan is then forgiven. Just like the hockey player locked in for the contract period, once again he becomes a free agent. 

Transition Allowance

A Transition allowance/payment is a structured payment for a set (equal) amount of equal payments, paid over a set time period (a number of months – over 1-2 years). 

In this scenario, the advisor is not paid for assets that are transferred. At least not on the front end. 

While the advisor receives his regular grid payout for an ongoing period of time, the transition payment option has a ‘look back’ feature: This formula allows the firm to evaluate his economic contribution over a set period of time (normally 2-3 years) and then make the remaining final transition payment at the end of that term, based on the cumulative total of the assets and revenues they represent.

This eliminates much of the risk for both parties as the assets have already been transferred in by that time. Again, any remaining payments are based on the amount of assets that have already been transferred to the firm. 

Bank dealers often resist using the term signing bonuses. But let’s clear; When a dealer is structuring payments based on assets that have been transferred together with a substantial initial up-front payment, that is exactly what it is. It is no different from the hockey player signing with his new team. 

Part of the reason for the ‘signing bonus’ payment is the recognition that part of the payment is made for the advisor to undergo the risk of making the move and transfer his assets over. It is in recognition of the fact that the advisor is assuming considerable risk to undertake the move, that he must be paid for that risk. It is very much a risk reward play. 

A hockey player switches teams. An Investment Advisor switches broker dealers. He is now representing another team, competing against his old team. He is no different from any other ‘free agent’.

What’s the difference between a Signing Bonus and Transition Allowance?

Signing Bonus

1. A signing bonus is a partial up – front payment with remaining payments tied to assets that transfer to the new dealer. These payments are ongoing. They become due every time asset hurdles have been met. They are event-result driven. 
2. The Advisor’s signing bonus is expressed as a forgivable loan. He is locked in for the duration of the term. He/she cannot leave unless he pays the pro – rated portion back to their dealer. The loan only becomes fully forgivable at the end of the term period. 
3. After the expiration of the incentive portion of the contract (not the duration of the overall contractual period) which is usually a two – year period, both remaining payments for assets, bonuses and grid protections are no longer valid. They simply expire. 
4. Payments for a traditional signing bonus kick in the moment assets have been ‘transferred in’ with his dealer. These are typically based on set tranches. (ex, for every 20/25M in, the advisor receives $250,000). As long as the transfer of assets occur, he can receive the full value of his deal within a few months (to a maximum of the term length). There is typically no cap on his commissionable earnings. There are normally riders to incentivize the advisor should he exceed his targets. 
5. The signing bonus and economic terms attached to actual assets that are transferred, are highly time sensitive. The Advisor must transfer those assets within the agreed upon set time frame, or else he loses all the economic benefits of these up – front payments. Ie, there is significant risk to the signing bonus option. 

 

Indeed, with this option, he must have a high degree of confidence of the client relationship in order for the transition to be successful. 

Transition Allowance

1. A Transition Allowance is normally structured in one of two way:                                                           a)  A guaranteed base salary for a 1-2 year period plus a bonus or commissions or balance of transition amount to be paid out at the end of a term.                                                                             b)  A monthly allowance for a period of 6-18 months (depending on the size of the advisor/IC’s practice) plus his commissions. The monthly allowance may or may not be a draw against revenues. It varies between dealers.
2. A transition payment may be structured as a forgivable loan. If the advisor resigns for any reason, he might be required to repay the original sum paid out to date, or a pre-set amount spelled out in the contract. In many cases, the ‘loan’ may be forgiven. 
3. Unlike a traditional signing bonus, a transition payment is not necessarily tied to an advisor’s practice. This option is typically used for Investment Counsellors rather than traditional brokerage-based Wealth Advisors. The risk profile is very different. 
4. In most cases, a transition allowance is not structured as a forgivable loan. Therefore, if the advisor doesn’t work out, he is free to leave without economic liability. There is usually a minimum time frame the advisor must remain with the firm to release him from any repayment. 
5. In most cases, there is no lock in period with a transition payment. The advisor could leave/resign; but at most, he would only be required to repay a portion of what he had been paid to date, or there may be a nominal amount to pay (perhaps 3-4 months). In effect, he is much more of a free agent without penalties. 
6. Since transition payments are structured as guaranteed equal monthly payments, they are not correlated to specific numbers of assets being transferred. In this scenario, there is far less pressure to raise a set amount of assets within a short time frame because of how the advisor is compensated. 
7. Finally, with many firms, the benefit of a transition allowance is that it is structured as a ‘look back’ program. This means that just like the investment advisor, the advisor/counsellor will still have his practice assessed by the dealer and an economic value will be attached to that practice. However, the final assessment is made at the end of the contract term, not at the beginning. And any subsequent payments owing, are only made at the end of that term.

 

In effect, this structure de-risks the deal for the dealer and advisor. In this scenario, he/she is under far less pressure to raise a set amount of assets because he wouldn’t be paid for them as they arrive but only at the end of the term. Hence the different measure of time sensitivity. 

If the Investment Counsellor doesn’t raise the assets he anticipated, he simply doesn’t receive the remainder of his transition payments at the end of the term. The same would apply to the broker on a traditional signing bonus formula.

For the dealer, other than the salary or monthly allowances already paid, they have not paid any additional up-front money out.