Everyone in the financial services recruiting world is buzzing about the headlines:

Merrill Lynch is letting go of low-producing brokers

Brokers with $250,000 or less in production are going to be let go.

Now no one wants to see good people out of work in this economy. This is obviously bad news for many families, especially in the holiday season.

The reality is, though, that these brokers couldn’t make it at the giant New York City brokerage.

ML is making room for bigger producers as well as a new influx of entry-level brokers. Merrill will put these new brokers through their training program and in a few years Mother Merrill will purge the lowest producers again. All the wirehouses have systematically purged their companies since the time of the “ticker tape.” See: McCann plays his first cards as head of UBS.

UBS just preformed the same kind of purging not too long ago. The Wall Street Journal reported last April that UBS planned to lay off hundreds to keep costs in line. Morgan Stanley will no doubt be announcing lay offs once the deal with Citi/ Smith Barney finalizes this summer. See: Why Smith Barney is now the most target-rich environment for recruiters of breakaways

Good news for RIAs? Think again.

These brokers newly turned out on the street are good news for the RIA world, right?

The first impulse is to swoop in and gather as many of these brokers quickly before someone else does.

Although that seems like a great idea, I must warn my clients and anyone who will listen that this is not the case most of the time.

Firms that recruit these people that are being rejected by Mother Merrill without exercising extreme caution, may not be helping themselves.

There are good reasons why some people do not make it in this business.

Think about this and keep in mind that this is my opinion based on 25 years or recruiting.

According to a rating scale used by most management teams, a broker with 5 years LOS should have about $50 million of assets under management (AUM). They would be considered “First Quintile” and be treated very well. With fee-based business a focus these days we can figure this broker will be producing about $350k or more. This scale, known as the McLaughlin Scale, identifies a broker who produces about $10 million of AUM a year as rising star.

With this in mind we can see that someone with 2-3 years LOS that has $20-30 million AUM will be producing less that the targeted $250k but will be considered “First Quintile.” Trust me, this broker will not be laid off unless there are serious FINRA (U-4 or U-5) or personality issues.

So this now takes us to the next level: 5 LOS or more. A broker with more than 5 years in the business who has less than $30 million AUM could still be a valuable member of a team where the senior broker would mentor them. They would be considered 2nd or 3rd quintile and it would be up to the manager on a case-by-case basis as to whether they will stay.

That brings us to the people Merrill is shedding.

Brokers with more than 10 years in this business who are not producing over $250k are almost certainly in the penalty box. They have not left the firm, despite penalities that might include lower commissions, micro management techniques like monitoring calls and meetings. etc. They are already on their second – or tenth – chance at Merrill.

What does this all mean?

For small business owners like RIAs, there isn’t much room to make mistakes. These brokers may look like inexpensive talent – they probably have been making $50,000 to $80,000 based on wirehouse pay grids.

Bu focusing your hiring budget on people being let go by someone else can impact a company in negative ways.

First you can inherit the problems.

Any sales manager can tell you that the bottom 80% of a sales force completes 20% of the sales. This would be the bottom of the bottom.

Consider that wire houses bought into the “friends and family” social networking concept long before Vice President Al Gore invented the internet.

Hire people who know people with money. This is the best way to build up assets quickly. The inexperienced broker approaches their friends and relatives with money who want to be supportive. Then, those people hit a ceiling if they can’t network beyond people they know.

That is when the problems start. If the phone doesn’t ring, they do not pick it up. Whatever the reason they are stuck, and moving to another firm will not fix it.

Matter of fact, some brokers who move to another firm will not get Dad or Aunt Millie to go with them because although blood is thicker than water, money is important.

Branding matters

The second problem that stems from hiring these brokers comes from in the area of branding. You don’t want to be known as the firm seeking small producers. It can become difficult to be taken seriously by larger producers in the long run.

A broker who is a 1st or 2nd quintile producer, who wants to grow his business and double his book, might hesitate to consider moving to a firm aggressively seeking low producers. They may believe that the firm lacks the scale to support their growth.

Last but maybe most important: As a small business owner, how many mistakes can you afford?

Remember the song Sinatra crooned; “New York”?
“If I can make it there, I can make it anywhere.”
Frank was singing about tenacity and strength. He was glorifying the people who epitomize the heart of New York City and the romance of making it in the toughest city on Earth.

Let’s face facts. It is romantic because some people don’t make it in New York.

I will guarantee you that the broker who failed at Merrill Lynch, UBS or Morgan Stanley/ Smith Barney did so for a reason. I am suggesting that extreme caution be used in considering investing in hiring them, even on a 1099 basis.

Mistakes have a way of snowballing and costing us more than our best contingency plan prepares us for.

Fred St Laurent is managing director of SCI Partners, an Atlanta, Ga.-based recruiting firm retained by RIA firms, credit unions, banks and mid-sized financial institutions to recruit brokers and advisors. St Laurent has been recruiting for more than 20 years in the financial services industry. He leads teams on large projects and has developed a strong reputation for training recruiters. He also writes articles and speaks at major industry conferences about staffing and sales-related issues.