Brooke’s Note: Generally I understand payout structures about as well as I get the small print on variable annuities. But this one has an appeal in its simplicity. Raymond James basically says: You pay this amount and the rest is yours — shades of the structure that draws hedge fund managers to that field. It sounds good and the recruiters interviewed here agree — and so do 90% of RJ’s top advisors. They’ve already opted in.

Raymond James is hoping to stand out among breakaway teams with $100 million in assets by dressing up its payout structure so it is more RIA-like and, ultimately, more competitive with RIA custodians. See: Raymond James launches a separate RIA unit and appoints a former Merrill Lynch breakaway to head it.

Raymond James’ previous payout structure was more complex and costly to advisors, and industry leaders say the company, with its splashy new policy letting advisors keep 100% of their advisory fees, is now poised to compete head-to-head with RIA custodians. See: AIG’s Advisor Group introduces a 100%-payout for big RIAs as part of a massive revamp of its fee-based platform.

“This is phenomenal. They’re letting you use their corporate RIA or you can use your own RIA. I think this is attractive,” says Ryan Shanks, founder and chief executive of Finetooth Consulting. “Raymond James is saying that they can still make profits by allowing 100% to pass through. I think advisors looking to break away who want to form an RIA will start looking at all of the costs associated. Here, if you’ve got $100 million, you’re going to get 100% back.” See: Wirehouses will create their own independent models, Tiburon report says.

12(b)1 fees reimbursed

The new compensation plan goes in place April 1 for advisors with at least $100 million in discretionary client assets under management. Advisors operating under this new model will keep 100% of their advisory fees and pay a quarterly fee to Raymond James based on their practice’s discretionary assets under management. See: Sparks fly after FundFire reports that Merrill Lynch and Goldman Sachs are offering some RIAs their corner-office research.

The fees vary depending on whether the advisor is using its own RIA or Raymond James’ corporate RIA. Advisors using their own RIA won’t pay more than $100,000 in annual fees and advisors using Raymond James RIA won’t pay more than $30,000 annually. The minimum assets for Raymond James’ RIA platform is $100 million. See: Raymond James launches a separate RIA unit and appoints a former Merrill Lynch breakaway to head it.

Another part of the deal is that mutual fund 12(b)1 commissions paid to Raymond James in clients’ managed portfolios will be reimbursed to the advisors’ clients instead of retained by the firm. See: RIA loses $10 million case against Raymond James the old-fashioned way.

Fuzzy good feelings

Raymond James has a culture of keeping its advisors happy, and advisors are typically brought into the fold with the promise of better financial packages, says industry recruiter Mindy Diamond, president of Diamond Consultants. This move could help Raymond James retain its biggest and best advisors while capturing a bigger stake in the recruiting game.

“The thing about Raymond James is advisors don’t leave because they’re unhappy. They love the culture and they love the people. They leave for economics,” Diamond says. “This is great positioning and is a very smart move. It will also make them a likely spot to land for other advisors looking to move to the independent landscape.”

Scott Curtis, president of Raymond James Financial Services Inc., acknowledges that his firm’s economic structure in the past made it a challenge to keep the biggest advisory teams, and he knows his firm’s top teams were at risk of being poached by the biggest custodians. Right now, of the 3,200 independent advisors at Raymond James, there are just about 100 advisors who qualify for this new payout structure, (managing $100 million) Curtis explains, and those are firm’s biggest advisors. See: With Dick Averitt retiring, Raymond James taps a star from within, Scott Curtis, to take on LPL.

“For our advisors that Schwab, TD Ameritrade and Pershing are focused on recruiting, those are the folks we were at the highest risk of potentially losing,” Curtis says. Of those teams, about 90% have switched to the new payout structure, he says.

Not only does Raymond James want to prevent custodians from nabbing its advisors, they want to be able to compete better with those same firms for breakaway teams.

Mindy Diamond: The thing about Raymond
James is advisors don’t leave because
they’re unhappy….They leave for economics.

Seriously agnostic

“We also want to get the breakaway advisors who would normally be considering Schwab, TD Ameritrade or Pershing, and we feel this makes us more competitive from a pricing standpoint and it’s easier to understand. The dressing is simpler,” Curtis says. “We see the growth in the hybrid RIA model. If you look at the studies, that’s the fastest-growing segment of the advisor business. We think this makes us more competitive from a growth opportunity and from a retention standpoint, it makes us more competitive for advisors who are with us.”

Curtis maintains his firm is still keeping its agnostic approach and doesn’t recommend one system over another.

“This isn’t a commentary that we think managing your business one way or another is better,” he says.

Breakaway potential

Shanks also believes this could give Raymond James an edge against its competition when recruiting breakaway brokers. “This is a potential huge win for the breakaway segment. This is a super-attractive offer for anyone who is independent. It shows that Raymond James is really evolving more to the fee-side,” he says. “Think about an advisor at another firm who is getting 92% or 95% payout and manages $150 million, they may want to make a move so they can capture that 5%. This is really interesting.”

Shanks points out the smaller IBDs couldn’t compete with this offering. “This is something extremely difficult for any firm to do without being as big as Raymond James. They’ve run and tested this model and the model clearly proves to be profitable. It’s really interesting,” Shanks says.

RJ RIA lure

Curtis explains that the new payout plan varies based on whether an advisor uses Raymond James’ RIA or if they use their own RIA.

Ryan Shanks: This is something extremely
difficult for any firm to do
without being as big as Raymond
James.

Advisors who use their own RIA will pay Raymond James 6 basis points, or $60,000 annually, on the first $100 million in discretionary management. Then, on the second $100 million in assets, those advisors will pay 3 basis points, or $30,000. Then, the fee goes down to 1 basis point, and advisors would not pay anymore than $100,000 in fees annually— even if they manage more than $300 million in assets, Curtis says. There is no incremental fee over $300 million in assets.

For advisors who utilize Raymond James Financial Services’ corporate RIA, the firm will charge an additional annual fee of 2 basis points on each advisor’s first $100 million of discretionary AUM, and 1 basis point on the next $100 million, up to a maximum of $30,000 annually.

Curtis says one team was so attracted to the offer that it decided to stop using its own RIA and will use Raymond James instead. He points out that on top of these fees these advisors still need to pay service fees and transaction fees as well as technology fees.

Curtis adds that his team spent a great deal of time talking with all of the teams that qualify for the new fee structure and about 10% decided that it was better for them to stick with Raymond James’ previous fee structure.

“There were just a few who weren’t financially better off, and it’s no surprise that they decided not to move business models,” he says.