Financial advisors who strive for more assets stand to reap new rewards.
That is the message major wealth industry firms delivered to their advisor forces with their compensation plans this year. As the economy improves, firms are going off the grid to reward advisors who are capturing growth and reaching new highs in their practices.
This change marks a turning point for the wealth industry. As firms have struggled with market and investor uncertainty since 2009, profitability targets have been elusive, according to Alois Pirker, research director at the Boston-based financial services research and consulting firm Aite Group. This year, as the economic outlook improves, grid payouts show stability and new incentives are being added to induce advisors to strive for more growth.
"Firms realize that now is a good time to push and to incentivize for growth," Pirker says. "[They're saying], 'Let's make sure we switch that gear again from defense to offense and start having an eye to growth much more than we had before.'"
That new push has manifested itself in a number of creative ways, including behavior-based bonuses. For large firms, that means incentives to expand work with clients, including a new emphasis on financial planning at UBS or tying in banking transactions at Merrill Lynch.
"The best firms align their rewards with the actual behaviors they're trying to promote, and they don't just do it with compensation," says Andy Tasnady, managing partner of Tasnady & Associates, who compiled the data for our ranking for this issue. Firms are also using training, management reviews and feedback, and technology tools to steer advisors in the right direction.
Large Firms, Big Incentives
As the four wirehouses unveiled their compensation plans for 2013, the changes all seemed to have one thing in common: behavior-based incentives for their advisors to attract new assets.
"They're definitely taking cues" from one another, Tasnady says of the wirehouse firms: Bank of America Merrill Lynch, Morgan Stanley, UBS, and Wells Fargo. "They have similar elements around growtheither growth in assets, growth in certain types of accounts, [or] growth in total sales."
On Wall Street's ranking for 2013 once again places UBS at the top of the list for the hypothetical models for the first two production levels$1 million and $600,000. Those results, according to Tasnady, are due in part to the firm's Growth Plus award, which provides advisors with a sum based on their production amount for each year.
"It's not really referred to in these change documents or the core plan," Tasnady says of UBS' Growth Plus award. "It has an eight-year life to it, so that's a positive."
Staying competitive at production levels above $1 million was an emphasis for UBS when it last changed its grid in 2009, says Jason Chandler, head of the firm's Wealth Management Advisory Group. This year's compensation plan at UBS, outside of its core pay grid, emphasizes rewards for broader investment advice.
That includes an enhanced payout for financial planning fees. If an advisor charges more than $1,500 for a financial plan, he or she receives a 50% cash payout and another 15% toward an expense account to use toward his or her business. So far the incentive has worked, Chandler says, with financial planning fees in January of this year up dramatically from January 2012.
The firm's research shows that clients are more comfortable with the advice they receive when they are involved in a financial planning relationship, and this leads to higher satisfaction rates and increased assets. "We also learned from talking to clients that when they paid for the plan, they're much more invested in it," Chandler says.
UBS also tweaked its productivity award this year to account for growth in 2013. Now, if advisors grow their businesses 15% or more this year, they will receive an additional 10% in their productivity award. At the same time, if an advisor's business declines by 15%, his or her award is reduced by 10%. The threshold to qualify for that award was raised to $500,000 from $400,000, in keeping with growth in overall production across the firm. Revenue per advisor rose to $1.001 million, UBS said in its results for the fourth quarter of 2012, a 15% increase from $869,000 in the fourth quarter of 2011.
UBS' plan rewards advisors for luring business that will increase transactions for other areas of the firm. When a client is looking to secure a mortgage, for example, UBS will provide advice and sometimes do the mortgage at UBS. The client, in turn, may have the ability to borrow against his or her securities portfolio to finance a mortgage or acquire other assets.
UBS has also made it possible for its financial advisors to access their deferred awardsincluding the net new money award, productivity and growth award, length of service award, and wealth management awardthrough one payment structure. Now, if an award is more than $20,000, an advisor can access half of that award through a six-year forgivable note.
"They're getting access to the award in cash now, instead of having to wait ... up to 10 years," Chandler says. "That's been very well received."
Merrill Lynch has made two major changes to its compensation this year. The first is a new strategic growth award, which replaces an asset-gathering award of years past. While the asset-gathering award was based on net new money, the new strategic award emphasizes strategic growth. That award, which is uncapped, pays advisors for "net new strategic flows" in a number of areas, including banking, fee-based assets, lending, and other annuitized products.
The second change involves the client transition program, which is aimed at keeping clients with the firm after their advisors retire. It now offers a larger opportunity for payouts over four yearsnow up to 100% to 160%, up from its previous rate of 50% to 80%. The change encourages advisors to grow their strategic assets and, when transitioning to retirement, receive higher payouts. "It gives you more incentive to grow your book and remain at the firm," a Merrill Lynch spokeswoman says.
Morgan Stanley has also added new incentives for advisors, including an option to defer some monthly incentive compensation to buy discounted Morgan Stanley stock on a pretax basis. To qualify for that plan, called the Capital Accumulation Program, advisors must have at least $400,000 in revenue. Both Morgan Stanley and Smith Barney previously had versions of this plan.
Morgan Stanley also revamped its growth award by raising it by a percentage point counted toward total production. That increase will provide an additional sum to pay client service associates for helping to dive a team's growth and give advisors who qualify for the initial growth award an allowance for business development.
"We wanted to make a more dramatic statement about rewarding financial advisors who are showing growth," says David Lessing, chief operating officer for U.S. wealth management. "We had a very high number of [financial advisors] qualify in 2012 for the growth award, which we were happy to see. And the way we've structured it for 2013, we'll have an even higher number of people qualify."
But Morgan Stanley made a cut in another area of its compensation, reducing its revenue bonuses by two percentage points. Advisors with revenue over $750,000 now stand to earn a bonus ranging from 0.5% to 4.5%.
Taken together, Morgan Stanley's compensation changes are "significantly more positive" for the firm's advisors, Lessing claims. "That growth award is uncapped, so you can make as much as you want, essentially based on how fast you grow," Lessing says. "It's available to every single FA, as opposed to the revenue award, which was only available if you were above a certain level of production."
Wells Fargo's plan changes this year are also aimed at pushing advisors to reach for more clients and more assets. The firm raised its monthly production hurdle for advisors by $1,000up to $12,000 from $11,000before they have access to the plan's 50% payout. It also changed the top level of its deferred award to $2 million, up from $1.2 million.
"We still expect to see an increase in productivity that would offset any of the changes that we made to the plan," says Erik Karanik, director of national operations for the Private Client Group at Wells Fargo Advisors.
Acquisition incentives include two awards for advisors who reach $250,000 or more in production this year. Those incentives reward advisors for growing their businesses either by bringing on a certain level of net new money or by adding new households with $250,000 or more. "We're rewarding both the growth of new clients coming to the firm or a combination of new growth and greater wallet share of existing clients," Karanik says.
An Overhaul at Raymond James
This is a watershed year for the pay plan at Raymond James. Coinciding with its acquisition of Morgan Keegan, the firm gave its compensation grid a dramatic and long-awaited overhaul, says Tash Elwyn, the head of Raymond James' employee broker-dealer.
Under the old Raymond James plan, an advisor who wanted to calculate his or her pay would first have to determine which of five categories a product fit into, the total commission from the sale, and then how that fit into a grid. Now the firm has created a single chart with two columns: trailing 12-month gross commission and payout percentage. The idea is that advisors can now get a reasonable estimation of their salaries simply by drawing their fingers across the page.
"The new grid accomplishes several things, beginning with simplicity, transparency, and product neutrality," Elwyn explains. "It also very importantly eliminates discount penalties on asset management, equity, and option commissions."
The move at Raymond James was designed to be cost-neutral to the firm, according to Elwyn. It essentially averages the payouts that advisors would have received for different products and standardizes it on the grid. Ultimately, the effect will be different for each advisor depending on his or her mix of products, according to Tasnady. In this year's survey, Raymond James' payout has fallen, based on a $1 million producer with an average product mix.
Many executives at regional firms that have already gone product-neutral say the change has helped their firms simplify their pay plans and distinguish themselves from some of the wirehouses. The guiding philosophy has been to keep the menu simple, according to a number of executives. Several claim that their firms' compensation plans could fit on the back of a business card.
"You can take some of the wirehouses, and they've got as much as a 30- or 40-page booklet," says Larry Tate, director of Southwest Securities' retail division. "[Advisors] really like the fact that they can carry the pay plan in their wallet."
Keeping payouts centered on the grid rather than product-based incentives has allowed regional firms to highlight their entrepreneurial culture, according to Allen Brautigam, director of retail branch offices at Stifel. "Some of the other plans are very complicated, and advisors are confused [about] how much they're going to bring home every month," Brautigam says. "Straightforward is better, and not differentiating our payout between products is better suited for the entrepreneurial broker."
Raising the Bar
A recent slight downward trend in base compensation also showed up among a few regional broker-dealers this year, according to Tasnady. "Core compensation seems to be flat or falling when you look at these graphs the last couple years," he says. "These graphs assume the same sales level, so firms have been trying to get advisors to be more productive in order to earn more in total pay."
But most regional firms appear reluctant to adopt the behavioral bonuses of their wirehouse brethren. They avoid account minimums and other directives that fall outside that core grid. "The regional firms haven't really jumped on or developed ... behavior-based bonuses," Tasnady says.
A couple years ago, Minneapolis-based Ameriprise tried incentivizing growth by providing an additional bonus for those of its 2,000-plus advisors who brought in households that had above $100,000 in assets. But according to Patrick O'Connell, senior vice president of the Ameriprise Advisor Group, that approach didn't pan out.
"What we realized is that those focused on growing would continue to do that activity and those who weren't focused there wouldn't," O'Connell says. "[So we] provided the compensation incentive right into the grid."
This year, regional firms relied on slight tweaks to their grids to help keep pace with growth.
"To incentivize our financial advisors to continue to grow their business and to reflect the rising cost of doing business in this slow-growth environment, we've moved each of the brackets up," says Jerry Lombard, president of Janney Montgomery Scott's Private Client Group. "We looked at what our profitability targets were and how to reach them, and we thought this was one of the better plays that we could make to help us toward that end."
At Janney and Ameriprise, the production levels in their brackets were bumped up $25,000, while the payout percentages were left unchanged. That means, for example, that a top advisor who had to produce $1,025,000 to earn 50% in gross total commissions last year will have to reach $1,050,000 this year to receive the same percentage.
According to O'Connell, the changes are part of the natural progression as firms achieve their goals and then strive to reach new heights. "People understand it," he says. "For those advisors who are growing, they're benefiting from the growth. At worst, it's a stable payout rate."
The move would have no immediate effect on a $1 million producer for Ameriprise, but it does at Janney. "Stretching your grid $25,000 is probably the smallest change you can make, but it has a measurable impact for the $1 million comparison," Tasnady says.
According to Lombard, the change is likely to affect about a third of Janney's advisors across all levels production if their production were not to increase. The changes were announced in October to give advisors time to make adjustments.
"I think our financial advisors understand the environment we're operating in," he says. "They want us to remain strong and financially viable."
The firm also bumped its club levels up $50,000, so the Pacesetter's club now begins at $550,000.
But lower-level producers at the firm may find themselves under more intense pressure. "From a percentage standpoint, $25,000 represents a much larger percentage at the $250,000 producer than the million-dollar producer," Lombard says. "For the brackets north of half a million, we're still going to be considered the number one or number two spot, and we're still going to be a relatively low rank for the lower-end producers. That's been consistent over the last four or five years, and that's by design."
Overall, RBC's total compensation ranking dips because of a change in the firm's bonus structure. Productivity and loyalty bonuses were consolidated into one bonus with a range of payout percentages. Where a $1 million producer would have hit 53.25% last year, he or she is now looking at a spread of 49.8% to 51.7%. The effect becomes more pronounced near the $400,000 production level where highest possible payout is now 43.5% rather than 45%.
According to Tom Sagissor, the North/Central divisional director for the Private Client Group at RBC, the move is aimed at simplifying the grid. "Our goal was really to keep our bonus simple," he says.
Another method for incentivizing growth is to increase the number of production levels, which makes the next payout percentage seem closer, according to Elwyn. The new Raymond James plan has 15 production tiers, which ties with RBC for the most.
Edward Jones remains an outlier in terms of its payout structure. The firm repays advisors for business expenses at their individual single-office branch, based on how well the firm is doing. "We run a separate profitability statement for every single branch, and branches participate in the profitability of the firm based on their individual branch profitability," explains Kevin Bastien, the firm's chief financial officer. "It's a combination of how profitable the firm is and how profitable each individual branch is."
That can make the firm's standing more susceptible to fluctuations in the economy, according to Tasnady. "They were very low when the market tanked a couple years ago, and now they're at probably the highest level that they've been since we charted this," Tasnady says.
It is still unclear whether relatively slight grid adjustments will be enough to encourage growth or if regionals will ultimately need to offer incentives similar to the behavior-based bonuses of the wirehouses. "What [Raymond James] had before was probably behaviorally shaped where they were trying to say, 'We're going to reward certain things more than others,' and they took that away," Tasnady says. "The next step would be possibly to put in behavior-based elements (not product-based though) to reinforce certain types of behaviors more than others."
Hilliard Lyons already offers some additional referral fees or incentives for sharing business between different divisions at the firm. Advisors with the firm can score a higher percentage of referral fees, for example, if they attend a class on sharing business with the investment banking division. But firms still fall short of directly cross selling or integrating cross-selling bonuses into the core plan.
At Stifel, "we own a bank, offer bank products, mortgage products, security-based lending, trust services, and things of that nature that we do pay our advisors on," Brautigam says. "But it goes on our simple payout grid, and we're not dangling a carrot in any specific area."
Janney is one of the few firms that has put in a large program tied to growth objectives, and it has had success with its Wealth Builder Program, which began in 2007. According to the Janney plan, an advisor with over $475,000 in production is eligible to earn between 3% and 7% in a deferred award as a percentage of trailing 12-month production for year-over-year gains of $75,000 or more in production.
"I was interested to see some of the larger firms announcing deferred programs and bonuses tied to growth objectives," Lombard says. "It seems like some people are coming around to our way of thinking that financial advisors should have additional incentives to grow their business and not just maintain it at the current level."
In coming years Janney will be looking toward other methods to encourage advisors to increase their asset base, Lombard predicts. But Tasnady believes those changes will come slowly. "Most firms never really want to make dramatic change," he says, "because financial advisors typically interpret any changes negatively at first."
Note: 2013 Best basic pay if you're producing ...
(Analysis represents starting points for payouts)
A number of special policies are not included here since they do not affect 100% of the population evenly and therefore are more haphazard to compare. Individual results can vary dramatically, based on the mix of business and policies at each firm. For example, pay can rise from special bonuses and fall from penalties such as discount sharing, small client limits, and ticket charges.
Assumptions for Basic Pay (prior to special policies/contingent bonuses)
* 25% in individual stocks; 25% in individual bonds; 25% in mutual funds; 25% in fee-based (wrap accounts, managed accounts, etc.)
* Year-end basic bonuses are shown in deferred totals.
* Length of service is assumed to be 10 years.
* Assumes no growth bonuses, no asset-based bonuses, or other behavior-based awards.
* Also excludes 401k matches or profit sharing contributions unless otherwise noted.
* Does not include: T&E expense allowance, discount sharing or ticket charge expense assumptions, small household or small ticket policy assumptions, or value of any options awards.