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Your TARP Money Put to Good Use

by Flexo on January 21, 2009

in Investing

About the author: Jeff Rose is an Illinois Certified Financial Planner™ and co-founder of Alliance Investment Planning Group. He is a veteran of Operation Iraqi Freedom, having served in the National Guard.

Warning: For those of you that have been laid off recently, received a pay cut due to the recent economic crisis or frustrated with the government’s misuse of TARP money, this article might be hard for you to read. First, let me give a bit of a background.

Prior to becoming an independent financial planner, I worked for a regional brokerage that was bought out by Wachovia Securities back in 2007. Upon the announcement of the buyout is when I first learned about the concept of the “retention package.” Basically, when a brokerage firm gets bought out, it is industry standard for the purchasing firm to pay the newly acquired brokers to retain them and prevent them from jumping ship to the competition. Most people who survive a buyout or merger are usually thankful that they have a job, and definitely don’t expect to get an upfront check to stick around. So the idea that somebody makes a payday for just staying put sounds a bit absurd, even more so considering the state of the economy.

What the buyout means to you

Okay, let’s fast-forward to modern day. As I’m sure you’ve heard by now, the largest and well known brokerage firm, Merrill Lynch, was bought out by banking giant Bank of America. When I first heard this announcement, the first thing I thought of was, “How in the heck are they going to pay retention packages to the brokers?” The housing market has been a mess and write downs are still a reality. From a PR standpoint, I just couldn’t see them justifying paying huge amounts “just to keep” brokers that are already in the top 1% of all wage earners. But then again, this is corporate America. Here’s what was offered, according to planadviser.com:

Advisers who produce $1.75 million in fees and commissions will receive 100% of their last year’s book of business (as of September 15): 75% of their bonus in a seven-year forgivable loan, and another 25% in deferred cash over three years.

Advisers who produce $1 million to $1.749 million in fees and commissions will receive a seven-year forgivable loan equal to 75% of their last year’s book of business, and can receive up to a 25% growth reward, payable over four years.

Advisers who produce $750,000 to $999,999 will receive a 50% seven-year forgivable loan and can receive up to a 25% growth reward.

Advisers who produce $500,000 to $749,000 will receive a 25% seven-year forgivable loan and can receive up to a 25% growth reward.

Advisers who produce less than $500,000 will receive get a 20% deferred cash payment.

For those that are outsiders to the industry, let me explain the first bullet point. An adviser that produces $1.75 million in fees and commissions generally will take home about 50% plus. The other half goes to the firm. So figure a broker who is at that level will make about $875,000 (minus taxes of course), plus deferred comp and other little perks that aren’t mentioned. That same broker is now getting paid $1.31 million up front just to stay put with another $437,000 coming over a three year period. Notice, too, the number is based off their trailing production as of September 15th, 2008, just prior to the market collapse in October. Isn’t that convenient? Keep in mind that the broker is still getting paid the fees and commissions that they generate. Remember, they didn’t lose their job. They just got bought out.

Your TARP money to work

Just the other day, Bank of America just received another $20 billion of TARP money to help with their acquisition of Merrill. Based on rough numbers, it’s estimated that $3.6 billion of this will be paid for the top brokers to stay in their seats. How’s that for our tax dollars at work? The $20 billion is in addition to the $15 billion that Bank of America received last October and the $10 billion that Merrill received on January 1st. There’s more to it, but I’ll leave it at that for now. In a nutshell, our tax dollars are going towards paying brokers to not seek employment from a competitor. In case that last sentence did not register, please reread it, think it over, and let it digest. How did that taste?

How does that make you feel?

With U.S. unemployment flirting with 8%, how does it make you feel knowing that a broker who already makes almost a million dollars a year is going to get paid over a million just to stay with his company? There are many words that come to my mind, but I’ll let you fill in the blank for me. Please share your thoughts.

If you enjoyed this article, please read more from Jeff Rose at his blog, Good Financial Cents, where he writes about financial planning and investing. You can also subscribe to the Good Financial Cents RSS feed. We would appreciate your comments and reactions, so if you would like to contribute to the discussion, add your comment below.

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Is a CFP Certification Necessary When Choosing a Planner?

by Flexo on May 9, 2008

in Financial Advice and Advisers

I like the new columns from Money Magazine featuring “The Mole,” an undercover financial planner. Like me, The Mole prefers to write anonymously to protect his or her identity. While my reasons for doing so pertain more with my desire to post sensitive personal information, The Mole maintains incognito status because he tends to speak out against the practices of his contemporaries and associates.

Some time ago, I considered publicly becoming a financial adviser or planner. Eventually, I decided it wasn’t the path I wanted to take, but the resulting discussion was interesting. So what does a would-be financial planner need in order to be hired and trusted by customers?

Perhaps a certification. The Mole says “maybe.” He has good things to say about Certified Financial Planners (CFPs), as he is one. This is a quality certification program with stringent requirements. Unfortunately, not all certifications require rigorous education and some have a loose grasp on ethics and fiduciary responsibility.

Now by my last count, there were more than 100 financial designations. Many, like the CFP, take a significant amount of time and expertise to master before the designation is awarded… Unfortunately, many of the others require nothing more than brief courses geared toward sales techniques; how to use emotions to sell annuities to seniors is a popular one.

A strong designation would reduce the chances your financial planner turns out to be sleazy like these annuities salesmen profiled by Dateline NBC.

However, even a designation like CFP does not guarantee the quality of the planner. Regardless of the designation, it’s best to get referrals from satisfied customers before selecting your financial planner. Don’t know anyone who is retaining financial advisory services? You can get referrals from the Financial Planning Association or the National Association of Personal Financial Advisors.

With referrals in hand, research your potential advisers with the North American Securities Administrators Association.

Walter Updegrave, another columnist for Money Magazine, submits the following:

I’d be wary of any advisers who contact me unsolicited, and doubly wary of ones who run free retirement-planning lunches or seminars. Many times such sessions are just a come-on to sell high-priced investments.

The lesson is to remain skeptical. If your adviser isn’t listening to your goals, suggesting products that are right for you, or trading frequently, it may be time to fire him or her, regardless of the adviser’s certification.

Do I Really Need a CFP? [Money Magazine]
Cracking the mysterious code of financial advisers [Money Magazine]

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