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What Are Up-Front, Forgivable Loans?

By SHUSTAK REYNOLDS & PARTNERS of Shustak Reynolds & Partners, P.C. posted on Tuesday, November 15, 2011.

Up-front, forgivable notes have been used by brokerage firms for many years as a way to entice high producing brokers to join- and, hopefully, remain- at the firm recruiting the talent. Virtually all firms use these notes as a recruiting tool, and almost all are structured the same way although sometimes with different names. Upfront, forgivable notes are routinely are used by Morgan Stanley Smith Barney; UBS; Banc of America Securities; Merrill Lynch; Ameriprise; Wells Fargo; Wachovia Securities and a host of other brokerage firms, large and small.

Although every case is different and some firms use different formulas, depending on the size of the portable book of business the prospective broker controls, the most common formula used by firms in computing how much of an up-front loan to make to the broker is one times the broker’s “trailing twelve”. The “trailing twelve” is the most recent twelve months’ worth of gross production generated by the broker at his or her current firm. The recruiting firm generally asks the broker to provide a print out of his or her “trailing twelve” to verify the amount of that gross production.

Once the recruiting firm has the details of the broker’s “trailing twelve” of gross production, the up-front, forgivable note is structured. The idea behind the forgivable note is simple. The brokerage firm picks an amount to be given, upfront, to the broker upon joining the new firm and the broker signs an enforceable, promissory note agreeing to repay that loan over a negotiated number of years, typically anywhere from 5 to 7 years which is the current standard in the industry.

If you are considering changing firms and have been offered an up-front, forgivable note, or if you already signed one and are considering a transition from one firm to the other, contact our managing partner, Erwin Shustak, at 619.696.9500, to discuss your options. More information about up-front, forgivable notes can be found at our web site, www.shufirm.com.

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