How much am I going to be paid this year? It's a question advisors ask themselves when they first glimpse changes to their firms' compensation plan.
The answer depends not only on an advisor's accomplishments but also on management's strategic vision. A firm's compensation plan is another lever to achieve long-term objectives and grow the bottom line.
At the wirehouse level, that may mean serving an increasingly wealthier clientele and perhaps selling more
bank products. At the regional level, there is an emphasis on stability.
Read more: Best Comp for $1M Producers
As in past years, advisors who are growing their practices will see more pay. However, that pay will continue to be an evolving mixture of cash and deferred comp, and increasingly tied to incentive-based awards.
The firms "have been adding to their plans, but they tend to do it in deferred. You can add a 2% bonus for a certain behavior, but do so in 2% deferred," says compensation consultant Andy Tasnady, head of Tasnady Associates.
"A lot of the action has been in these behavioral bonuses, where firms are trying to encourage certain behaviors, such as lending or growth or fee-based business," Tasnady says.
As wealth management firms continue to tinker with compensation plans, enticing advisors to do more business or develop new streams of revenue, they also discourage advisors from other business practices. More restrictive small household policies drive advisors to focus on bigger accounts.
Whether these changes are a net positive or not for advisors depends on their books of business. But understanding why comp plans have changed and where they may be headed is contingent on comprehending each firm's strategy and positioning within the marketplace.
Performance bonuses have now become an integral part of compensation plans, helping firms encourage their advisors' business growth, and thereby lift overall profits.
Merrill Lynch, for example, left its core grid unchanged, but enhanced a strategic growth award, doubling the base payout for new net strategic flows and tripling payouts for new net households. For example, an advisor who brings in two or more new net households totaling between $10 million and $50 million will earn a bonus worth 30 basis points.
Under its 2015 compensation plan, Merrill Lynch also requires one cross line business connection by advisors or their teams. For example, an advisor would introduce a client to Bank of America's consumer bank or business bank to discuss lending needs.
"The majority of our FAs already introduce their colleagues and we want make sure all our clients are aware of what the enterprise can offer," a Merrill spokeswoman said after the plan was unveiled.
As a regional, Janney Montgomery Scott is focused on serving wealthy clients primarily along the East Coast. To be a leader in that market, the firm uses its comp plan to attract and incentivize high producers, says Jerry Lombard, president of Janney's Private Client Group.
"We are comp heavy in terms of higher-than-average payouts for the FAs that do the most business, and well below average for FAs who do less business," Lombard says.
He points to the firms' wealth builder award, instituted in 2007, as a key bonus for advisors. For example, an advisor generating at least $550,000 in annual revenue and managing at least $60 million in assets could earn an extra 5% in pay if that advisor boosts his revenue by 15% and increases new net assets by 12%.
The bonus can be awarded in conjunction with Janney's club level awards, and can add up to significant amounts if an advisor meets the criteria each year.
UBS focuses on serving ultrawealthy clients, and is shaping its advisor force to match that, says Jason Chandler, head of the firm's eastern wealth management division.
"The strategy that we are on is to become the firm of choice among high-net-worth and ultrahigh-net-worth clients, and the advisors that serve them. That umbrella strategy really drives much of the decision making in our compensation plan," he says.
This year, UBS doubled the maximum payout on an award growing an overall practice to 6% from 3%. Chandler that acknowledges the firm has lowered the hurdles for this award, expanding the qualifications to include revenue earned from advisory, insurance, lending and planning fees.
"2014 was our most successful year in terms of raising new net money for advisors who had been at UBS for one year or more. We plan on 2015 being another strong year," Chandler says.
The firm appears to be making progress toward some of its goals. Advisor headcount fell to 6,997 advisors for the 2014 fourth quarter from 7,137 a year ago, but UBS boasted the highest productivity among the wirehouses: $1.091 million per advisor, up 5% year over year.
"We are less concerned about the number of advisors we have, but much more with the quality of the advisors we have at UBS," Chandler says. "Consistent with that strategy, our comp plan is built so that advisors who are serving high-net-worth and ultrahigh-net-worth clients and growing are going to be paid at the top levels of the industry."
The behavioral-based bonuses have proven a success for firms. Janney's Lombard says that, historically, his firm's awards and grid levels have motivated its advisors to increase their businesses.
"We have good migration up the grid and up the club levels," he says.
For their part, advisors agree the tactics often work. "I was very influenced because I wanted to succeed, and that's what they were saying to do to succeed," says one wirehouse advisor doing more than $2 million in annual revenue.
Another wirehouse advisor, who asked not to be named, says he will not change his behavior unless it's right for his clients. "But there are some guys who will move their business because they want those bonuses. Then it comes down to ethics, because am I doing this because it's good for me, or for my clients?"
Many bonuses will be deferred pay, and as firms tweak comp plans, some advisors will see a larger portion of their overall pay deferred in 2015. This strategy has been called golden handcuffs.
"There is a certain amount of holding power for the firm, where you lose it basically if you leave the firm. So it has retention value," Tasnady says.
Lombard thinks the golden handcuffs' holding power might not be as strong as it once was. "Years ago, deferred comp was viewed as that golden handcuff, but with the size of the recruiting deals on the street, even the most aggressive deferred plans — and ours offers up to 12% — is a fraction of what you could get in terms of a wirehouse recruiting deal. So it doesn't act like the golden handcuffs that it once did in my view," he says.
And yet deferred comp has gone up in some plans. As Tasnady notes, it plays another key role as a tool to avoid costs.
"The firm doesn't have to recognize expenses until it vests and the advisor doesn't have to recognize the additional taxes until it vests," he says. "The negative is that the advisors like to have cash up front. Everyone would prefer not to have any lost income if they do move."
Morgan is among the firms to have increased the amount of deferred compensation. For example, an advisor with 10 years of experience at Morgan generating $1.1 million in annual revenue could earn the same total compensation this year, but under the 2015 plan, the portion of deferred comp could increase to 10% from 8.3%.
Barry Goldstein, chief operating officer of field management at Morgan Stanley Wealth Management, says management made the "relatively modest" changes after considering where the firm stood relative to the competition.
"We balance the ratio of cash to deferred in relation to the entire industry, and we believe that we are in completely in line with compensation practices in terms of the percentage of cash to deferred," he says.
To push productivity and revenue higher, some firms have been placing restrictions on serving small households to cajole advisors to focus on more profitable accounts. Last year, for instance, UBS raised its minimum to $100,000 from $75,000. Management left it untouched for 2015, in part because they felt it necessary to leave advisors some wiggle room, Chandler says.
"We trust that they are going to spend their time with the right clients that fit our strategy. And if you trust them, then the flexibility can only help," he says.
This year, Merrill Lynch amended its policy. Merrill advisors will be paid 20% on accounts of $250,000 or less if those accounts make up no more than a fifth of their overall book of business. The firm will not pay if more than one-fifth of their business consists of small accounts. A Merrill spokeswoman says only about 3% of the firm's advisors may be affected.
"Clients have told us that they want someone there at all times to answer their questions. For those clients below $250,000, they are well served by our team in the Merrill Edge Advisory Center," the spokeswoman said.
Some advisors, however, take issue with these types of policies, saying they are too severe. The wirehouse advisor generating more than $2 million in revenue acknowledges that management needs to take costs into account: "I don't object to that as a blanket rule. I object to not allowing exceptions."
The advisor, who asked not to be named, says the small accounts he has are mostly ancillary to his large clients; some are the children or grandchildren of his wealthiest clients.
"I should get paid on those because you want me to expand intergenerationally," he says.
The advisor notes that even if serving a client's adult children isn't lucrative today, "one day they are going to inherit that money."
Another wirehouse advisor, who also has small accounts related to his larger clients, thinks the policy may be shortsighted.
"With them pushing small accounts away, and with the Schwabs and robo advisors picking up those small clients, what is their strategy to pick up these people once they have the right amount of assets? Do you think you can get them back once you've cast them away?" he asks.
MOVING THE GOAL POSTS
Industry insiders say too many changes or ones that are too abrasive jeopardize losing advisors to another firm or to the independent channel.
"If [the firms] push too far, they risk losing advisors or being unable to recruit," says Michael King, president of recruiting firm Michael King Associates. He adds management has "to be aware of the line."
So do wealth management executives take this into account when developing compensation plans?
"Absolutely. Definitely," David Kowach, head of Wells Fargo's private client group says. "I want people to love it here. You can't love it here if you don't think you're getting paid right."
Kowach says he and his team traveled to many branches and gathered input from the firms' advisors, resulting in a message that advisors at Wells Fargo wanted less change and more simplicity.
Morgan Stanley executives, like their industry counterparts, spend months considering what, if any changes to make to their compensation plan. They also receive input from the firm's financial advisor and branch manager councils.
"We take some of their suggestions. We don't take all of them. But it is very valuable in shaping the plan," Goldstein says.
Executives also recognize it's a competitive market for top talent.
"Compensation is an important lever for attracting new advisors and retaining existing advisors. We are sensitive to the overall market and we take that into account when considering any changes to our compensation plan," Goldstein says.
UBS' Chandler says executives there also take into account the perspective of their FAs.
"Our belief is this: We are in the advice business. Our financial advisors provide the advice to the clients, and therefore keeping the best advisors is our utmost priority," Chandler says.
This is one area where the non-wirehouse firms differ: Some make few, if any changes, in their compensation plans year to year. Raymond James & Associates has not made changes to its plan in two years because it works well for the firm and its advisors, President Tash Elwyn says.
"We believe we have structured and invested in an attractive and fair and reasonable compensation structure so that we are able to retain our financial advisors, which is the most important foundation to be able to grow," Elwyn says.
Janney's Lombard says there are two reasons his firm makes few if any changes year to year. First, comp plans already contain incentives to grow.
"I don't know why you always have to move the goal posts if the goal posts are already there," he says. "Each level on the grid, each club level, whatever growth awards, they are already built in."
Second, advisors don't like change.
"If you want to keep them focused on their clients and building their business, why distract them with a bunch of compensation changes? That's just our philosophy," Lombard says.
But will changes in compensation be a catalyst, leading many advisors to leave their firms? Industry insiders say that depends largely on the advisors.
"A poorly designed comp plan might make some advisors pick up the phone and say, 'Tell me again about this deal,'" one former Morgan Stanley branch manager says.
But, he adds, for others it will simply be a nuisance that they'll quietly accept. A lot depends on the caliber of their branch manager.
"If you're a good branch manager, then you're going to say, 'This is the deal for this year. Here's all the positives.' You're trying to sell it," he says. "'You're not going to get paid on these small accounts, but if you do this much in lending, then you'll make more money.' You try to find a balance in there."
One regional branch manager agrees there are a lot of variables. One more restrictive small household policy may be a minor disruption to an advisor in a lucrative market with a big book of business. But it could be a big headache to a younger advisor or an advisor in a market like Boise, Idaho.
"I think it really comes down to the individual advisor," says the manager, who asked not to be named.
While recruiters say rivals are likely to benefit if a firm implements changes that are regarded by advisors as too severe, the former Morgan manager predicts the wirehouses will backpedal quickly.
"The firms will learn their lesson if they have a bad comp plan and people start leaving," he says.
In the meantime, however, a lot can happen to a firm's advisors.
"Anything that a company does that upsets them is a motivating factor. But the reality is that they should be moving because of a better platform, because the client experience will be a better one at another firm," says Mickey Wasserman, president of recruiting firm Michael Wasserman & Associates. "But being angry at their company doesn't hurt."
THE BOTTOM LINE
Compensation is a goal that advisors work toward throughout the year. For the firms that structure comp plans, it is a means to a longer term goal.
When the tallying is done, the total pay can add up to a handsome sum – but only if the right markers have been passed and the penalties avoided. Whether the latest changes bode well for advisors this year and next is contingent not only on the firm where they work, but also on the advisors themselves: Each book of business is unique. Some will welcome these changes; others will prefer the status quo. And an unknown number will eye the exit.
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