Breakaways and Independent Advisors Should Evaluate Upfront Money with Caution

Established independent financial advisors and breakaways alike are being offered upfront money as an incentive to affiliate with larger RIAs and custodians. Because these deals, which often involve significant sums of money to motivate you also require specific commitments or obligations, all financial advisors who find themselves in this position should consider whether it’s right to accept the deal before making a change. With all things in life, there are pros and cons of accepting upfront money that should be considered

This article explains some of the typical requirements of accepting upfront money to make an affiliation change. Without understanding the differences between transitional money and upfront money, you may mistakenly agree to a long-term commitment that comes with certain strings attached. The following “strings” can reduce the control you have over your business. Therefore, before agreeing to such an offer, be sure to know the answers to these four questions.

How long are you locked into the contract?

This is a big consideration because such a contract can determine how many months or years you are committing to this obligation and in what capacity.

Company contracts determine when advisors can move outside the company, so it is essential to know when their obligation will expire. It would be unethical for an advisor to change their company structure to not let their clients know of the impact beforehand, so advance notice of changes makes it easier on both the client and the advisor. 

How will the upfront money impact you from a tax perspective?

It’s vital to know that upfront money from any firm is a taxable event for financial advisors.

The upfront money an advisor receives will be subject to federal, state, and local taxes, mostly calculated based on the amount of upfront money received. For example, if an advisor receives upfront money as an incentive to switch companies, this typically requires upfront income tax withholding. There may also be additional estimated quarterly taxes to pay.

What may happen in the event of a potential sale?

The sale of a financial advising firm will affect its financial advisors in two ways. The first way is when the advisor stays with the company. Financial advisors working for an advisory firm that has been acquired often face either relocation or layoffs. These disruptions can create challenges in securing stable clients and sometimes lead to inexperienced employees inheriting clients once acquisitions impact wealthier clients.

If the advisor disassociates before a sale, they may need to pay back a portion of their upfront package. Upfront payments are primarily given as a lump sum upfront rather than paid like regular compensation. Refunding upfront money could significantly affect their business.

Both scenarios can affect the long-term stability of an advisor’s career, which is why financial advisors should only accept upfront money after careful consideration. You should always know what your obligations will be in the event of a sale of the firm.

Will you be tied into using proprietary products?

Many large financial advisory firms require their employees to sell or even use specific products they’ve developed. Using a firm’s proprietary products is a common request. It can make it challenging for advisors who want to provide personalized advice without limiting themselves too much by the advisor firm’s interests.

Before accepting upfront payment, be sure you understand what your obligations will look like. Will you be required to use the company’s products even if your client doesn’t need them? If upfront payment requires a long-term commitment, will this imprudent financial decision limit your ability to do more work for clients in the future?

In Conclusion

When accepting upfront money from any firm, it is best that an advisor understands their role and what they can and cannot do within the position. There can potentially be a long-term career, lifestyle, and financial strings attached to accepting any upfront money. Therefore, you should only accept this type of offer after careful thought and consideration. To learn more about being an independent financial advisor, please visit the Fragasso Financial Advisors website,

Investment Advice offered by Investment Advisor Representatives through Fragasso Financial Advisors, a registered investment advisor.

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