Employee Forgivable Loans (EFL) - Many Stockbrokers (Financial Advisors) have them and why you should be extremely cautious.

Written by Ethan S. Braid, CFA on 8-03-2012

Employee Forgivable Loans (EFL) – Many Stockbrokers (Financial Advisors) have them and why you should be extremely cautious.

 One of the lesser known, but very serious conflicts of interest plaguing most of the Wall Street brokerage firms these days is the employee forgivable loan. An employee forgivable loan (EFL) is a bonus payment, often over $1 million dollars, given to many stockbrokers by their employer. These bonus payments are often structured in ways that can encourage stockbrokers to churn their clients and/or put their own interests ahead of their clients’ interests. EFLs are given to stockbrokers for various reasons and a large percentage of today’s veteran Wall Street stockbrokers are currently under EFL contracts. Generally speaking, EFLs are provided to stockbrokers for one of two reasons:


  • To keep stockbrokers from leaving their firms.
  • To entice stockbrokers to switch firms. 

Some of the typical triggers for providing an EFL to a stockbroker :


  • Stockbrokers switching firms.
  • One firm acquires another firm.
  • Significant disruption in the financial markets (think financial collapse of 2008).


When a stockbroker switches firms, most of the time she will be offered a significant financial incentive to make the move. For example, a stockbroker is currently employed at firm A and firm B is trying to recruit her to leave firm A and join firm B. In order to induce the stockbroker to leave firm A and move to firm B, firm B will offer her an EFL. The EFL is provided to her by firm B the day she lands at firm B. Many of today’s EFL deals are worth millions of dollars.


When one firm purchases another firm, EFL payments are usually handed out to most of the stockbrokers of the firm that was acquired. These payments are made to the stockbrokers of the acquired firm in an effort to prevent them from leaving. For example, Firm B purchases firm A and provides EFLs to the stockbrokers of firm A as a way to keep the brokers happy and ensure they don’t leave. Firm B expects that if the acquired stockbrokers are provided with very large bonus payments, then those stockbrokers will be a lot less likely to leave. The old adage, “fat, dumb, and happy” rings true. Additionally, today’s EFL deals contain a great deal of legal restrictions, often in the form of non-solicitation clauses that can make it difficult for a stockbroker to leave her employer once she has accepted the bonus payment.

In the wake of the financial crisis of 2008 many stockbrokers saw their personal investment portfolios shrink in value, their incomes drop, and at the same time were under significant pressure to defend the reputation of their firms. The combination of these forces influenced many advisors to change firms in an attempt to rebuild their own net worth and increase their income during the market’s meltdown. Recognizing the danger of losing large numbers of high producing stockbrokers, many brokerage firms provided EFLs to their larger producers in the hopes that the stockbrokers would not change firms. Oddly enough many of these EFL payments were made after these firms were bailed out with taxpayer dollars! 

What does an EFL deal look like?

Most EFLs are based upon two factors. How much in commissions & fees the stockbroker produces and how much in client assets the stockbroker manages. Each firm has a slightly different formula, but they are all very similar at the end of the day. In today’s market, an EFL deal for a stockbroker changing firms can be up to 330% cash payment to the stockbroker based upon her last 12 months fees & commissions. Often the deal is paid in stages with 125 – 150% upfront and the remaining 180 – 205% paid over the next two years.

 For example, a stockbroker decides to leave firm A & join firm B for a 300% EFL deal:


Stockbroker’s commission in last 12 months


Upfront bonus payment multiplier


Upfront EFL payment


The $1,250,000 payment to the stockbroker is typically all in cash. Additionally, there are no taxes withheld, instead, the stockbroker literally gets a check for $1,250,000 and then pays the taxes over the next 5 – 10 years, depending on the terms of the contract. Most of today’s EFL deals are 9 years long. Therefore, every year on the stockbroker’s anniversary date, 1/9 ($138,888 in this case) of the loan is forgiven and the stockbroker will owe taxes on the forgiven amount in that tax year. Thus, provided the stockbroker stays at her new firm for 9 full years, she will have had all of the EFL forgiven and ultimately earned the entire EFL bonus as W2 income. Should she decide to leave the firm prior to the 9 years being up, she will then owe the firm any balance outstanding that has not been forgiven. Hence, EFLs are sometimes referred to as golden handcuffs.

Now, one should also note that the typical stockbroker gets paid about 40% on average of her commissions and fees. So in the example above, a stockbroker generating $1,000,000 per year in commissions & fees will get paid about $400,000, pre-tax W2 income, by her employing firm. The other 60% goes to the firm’s managers, sales managers, overhead, shareholders, et al.

When switching firms, the average stockbroker will take about 70% of her clients & client assets with her to her new firm. Often stockbrokers will be able to retain most of their revenue when switching firms because the 30% that stays behind tends to be their least meaningful and lowest revenue bearing accounts. Therefore, by switching firms, a stockbroker stands to gain a significant windfall due to the fact that she will be able to duplicate her income stream at the new firm and also get a large bonus payment from the new firm. Faced with this financial opportunity, is it any wonder that stockbrokers change firms routinely?

The second stage of the broker switching firms EFL deal is the “back-end” payment, of which there can be several. These back end payments are generally made within the first two years after the stockbroker has changed firms. The back end portion of the EFL deal is based upon the commissions & fees produced at the new firm and the amount of client assets that followed the stockbroker to the new firm. Sticking with the example from above: 

Stockbroker’s commissions in year 2 at new firm


300% deal multiplier


Final EFL payment to the stockbroker:


Less original upfront payment


Net check for 2nd EFL payment




Total of both EFLS (paid to the stockbroker)


I give you a $1; you give me $3.30…Sound Good? 

  • Significant churning can take place in the year prior to a stockbroker switching firms and in the two years following a stockbroker switching firms.


Most stockbrokers will spend months and sometimes years planning their move from firm A to firm B. Knowing that they will get paid up to $3.30 by the new firm for every dollar of commission they generate at the old firm, there is a significant incentive for a stockbroker to grow his or her revenue as much as possible in the months leading up to her departure from firm A to firm B. Getting paid $3.30 per commission dollar in addition to the standard 40% of each commission dollar is an incredible way for a stockbroker to leverage her commissions!  As a result of this deal structure, a stockbroker may be more likely to churn her clients and/or sell big commission products like life insurance, variable annuities, structured products and limited partnerships in the year leading up to her employment switch. Because stockbrokers are not fiduciaries and are held to the lower standard of care in the investment world, also known as the suitability doctrine, they can more easily get away with this type of behavior. In other words, this is a form of churning that can take place and it will not show up on the regulators’ or brokerage firm managers’ radar because the investments were “suitable” for the client. In fact, the stockbroker will likely be congratulated by her employer for increasing her commissions!  For example, selling a variable annuity to a client who is interested in “guarantees on principal” is a 100% compliance approved activity…never mind the fact that annuities usually pay a 7% commission that the client doesn’t see while bank CDs (also principal guaranteed) pay about .10% commission…hey the stockbroker found a “suitable” investment product for the client…it just so happened that “suitable” investment paid her the maximum commission. Add in some life insurance to the deal and now you are really cranking the commissions out. All of this is perfectly legal and comes under very little scrutiny with respect to the following question: was the commission driven sale(s) motivated to result in a higher EFL payment? The firm the stockbroker just left isn’t going to make a fuss because they benefitted from the recent sales she made. The firm that the stockbroker is going to isn’t going to say a word either because the sales manager at the new firm gets paid more for larger producing brokers. Unfortunately the whole system is geared towards how much can be squeezed out of the client. Hiding behind the suitability doctrine is something that stockbrokers and their sales managers have done since 1934 and likely won’t stop doing anytime soon…


Once the stockbroker lands at the new firm, she is once again incentivized to find ways to maximize commissions and fees. Again, all perfectly legal because under the suitability doctrine, she can show clients the investments that pay her the most commission provided the investments are “suitable.” Considering that over the course of the next two years at the new firm, the stockbroker is eligible to get paid up to 330% of the commissions & fees she produces, you can bet that she will look for every “suitable” way to generate as much in commissions & fees as possible.


As one who spent over a decade working as a stockbroker (financial advisor on today’s business cards) at two of the largest Wall Street firms, I can tell you first hand that the type of churning I have indicated in this article happens. In fact, the frequency with which this type of churning takes place is nothing short of alarming. I have personally heard stockbrokers make comments like, “I am coming up on my EFL anniversary date, and I need to put some structured products and annuities into clients’ accounts to max out my EFL deal!” No harm done as long as those non-transparent commission laden products are suitable right?


The intent of this article is not to demonize those in business who strive to produce more revenue year over year. Growing a business is what our capitalistic society is all about. Competition brings out the finest in all of us and it is that competitive spirit which makes America great. However, no-one likes to be taken advantage of. The current system that we have in place at most of the Wall Street brokerage firms is corrupt and stacks the odds against the client. Advice is often based upon the “YTB” an acronym for “yield to broker.” Put another way, stockbrokers always want to know what they will get paid before they talk to a client about a product or service. All too often the client ends up on the short end of the stick.


One way to eliminate all of this non-transparent, behind the scenes scheming is to work exclusively with fee-only registered investment advisors. Fee-only advisors have no products to sell, operate as fiduciaries and work on a very transparent fee. Note: do not confuse fee-only with fee-based. Fee-based is a product that can be found at all of the Wall Street brokerage firms. For example, your stockbroker offers you a “wrap account” and tells you that you will pay a fee based on assets. What you just got was an account product developed by her firm. She is still in position to sell you life insurance products, limited partnerships, hedge funds, structured notes, credit lines, etc., all for commissions which you may not see…don’t get fooled! Know the differences between fee-only and fee-based. A fee-only advisor cannot accept commissions and her only source of income will be the fees that she charges. All of which will be extremely transparent.


Ethan S. Braid, CFA


HighPass Asset Management

800 – 672 – 7916



About the author of this article.


Ethan S. Braid, CFA is the founder of HighPass Asset Management – an independent, fee-only, registered investment advisory firm with a fiduciary duty to the clients it serves. Mr. Braid has been passionate about managing client investment portfolios and providing customized financial planning advice since he started working in the investment industry 13 years ago. Mr. Braid earned a BS in Finance from Robert Morris University, an MBA from Cleveland State University and he is also a CFA Charterholder.                                                                                          

Mr. Braid is devoted to being an expert in the field of wealth management for high net worth individuals and families and for many years, has read one book per month on subject areas such as: estate planning, retirement planning, investment analysis, mergers & acquisitions and behavioural finance. Mr. Braid also has a passion for business history with a focus on the late 19th & early 20th centuries.


When Mr. Braid is not helping clients, he enjoys: cooking, wine, exercise, his yellow Labrador retriever, fly fishing, hiking, travel, playing guitar and duck hunting.