Wealth advisors once snubbed Wall Street for First Republic. Now, they are running back to firms like Morgan Stanley.

  • First Republic offered big sums of money to recruit elite advisor teams from Wall Street banks.
  • These multimillion-dollar bonuses are actually loans that advisors have to repay the struggling bank.
  • Advisors are still leaving in droves even though banks likely aren’t matching those megadeals.

First Republic had raided Wall Street wirehouses including Morgan Stanley, UBS, and Wells Fargo for its top wealth advisor talent over the last several years. It offered handsome bonuses and attractive offerings for wealthy clients, like huge mortgages on sweet terms

The San Francisco bank hired a Morgan Stanley team with a $1.2 billion client book in the greater Los Angeles area as recently as March 3. 

Now, the embattled bank is seeing an exodus of the talent it lured— and Morgan Stanley is emerging as a winner. 

The Wall Street bank has brought on at least eight teams that managed a total of $8.68 billion from First Republic since the banking crisis started on March 10, according to a running tally by industry trade AdvisorHub. A Morgan Stanley spokesperson told Insider the hiring was unsolicited.

Other firms, including JPMorgan and Rockefeller Capital Management, have also welcomed advisors from First Republic as the bank’s future remains uncertain.

Team lift-outs can often take months, but many of these advisors are relatively new to First Republic, which is contributing to the speed, said recruiter Phil Waxelbaum. A move after a short period of time with First Republic could also cost them.

Before the banking crisis began, First Republic was able to get top-notch advisors, who typically had revenues of at least $10 million, by offering them bonuses of up to 400% of their gross commissions and fees from the previous year, according to Waxelbaum.

Like most wealth managers, newly recruited advisors receive most of the compensation upfront in the form of a loan that is forgiven if the advisor stays with the firm for a certain number of years, and the rest is paid in backend bonuses. An advisor team with $2 million in production over the 12 months prior to recruitment could make $8 million if it meets all their goals, for example.

Since most of the advisors leaving joined First Republic within the past two years, they are on the hook for the remaining loan balances as they haven’t met longevity requirements, according to Waxelbaum.

However, even though these advisors to the rich are sought-after, banks aren’t necessarily shelling out as First Republic did. Two sources familiar with hiring discussions at Morgan Stanley told Insider that the bank was not matching those top-of-market deals. One added that Morgan Stanley’s offers, while good, were not as high as those of some other competitor, but that the bank was “winning on their own merit.”

These jumbo loans discourage advisors from leaving, but First Republic’s situation is urgent

Advisors are loath to take pay cuts when they switch firms as it means owing money to their previous employer, and these forgivable loans can function as “golden handcuffs.” But they are making exceptions as First Republic’s situation is so dire, said one of the sources.

“What other choice do you have? If you care about keeping your business and your clients, you have to figure out an option that gets you close enough to the mark,” he said on the condition of anonymity as he was not authorized to speak to the press. “There’s a reason why the big firms are winning as they are able to pay the most amount of money to help these advisors at least get close to par.”

First Republic first came under scrutiny in the wake of Silicon Valley Bank’s implosion. On Monday, the bank said it was pursuing strategic options, like a potential sale, and cutting as much as 25% of its staff. It’s been reported the government is unlikely to intervene. Its stock has been hard hit, it closed at $6.19 per share on April 27, down from $147 in early February.

A spokesperson from First Republic told Insider that teams that have departed were responsible for less than 20% of total wealth management assets as of March 31, and that they “anticipate retaining a portion” of the assets tied to those teams. He added that the bank had retained nearly 90% of its wealth management staff as of April 21.

“We remain fully committed to our integrated banking and wealth management model, and the unique benefits it provides to clients, ” said spokesperson Greg Berardi.

Morgan Stanley was one of 11 banks to provide a combined $30 billion in uninsured deposits to First Republic. And much like other Wall Street banks, it also greatly benefited from the rich pulling their money from seemly shaky regionals to “too-big-to-fail” institutions. 

Morgan Stanley revealed in an earnings call that about $19.6 billion in net new assets were attributable to advisors and clients fleeing struggling banks like First Republic for Morgan Stanley.

Morgan Stanley has been bringing on new advisor teams since shortly after the banking crisis started, hiring First Republic broker Vishal Bakshi with a $1.5 billion client book on March 17. Its hires span both coasts, most based in New York City and a few in California and Florida. One team had been at First Republic for only four months before jumping ship.

“I think that what we continue to see is that we remain a destination of choice,” said Yeshaya on the April 19 call. “Not only for new advisors, but also obviously, as we stated, from the assets held away that we continue to aggregate in both the net new assets from existing and from new clients.”

Given First Republic’s murky future, it is unclear if advisors will be held accountable for paying the full remaining balance of their loans. Typically the Financial Industry Regulatory Authority, an independent self-regulatory body better known as FINRA, is very rigid when it comes to enforcing promissory notes. But the very public implosion of First Republic may give advisors some cover, said Waxelbaum, who has served as an expert witness before FINRA panels.

“If you have a firm that fails, is FINRA really going to hold the advisor responsible for the liability?” he said. “A good lawyer representing the advisor is going to say, “Look, they imperiled my client’s livelihood.'”