With many long-term retention contracts expiring, wirehouses are under pressure to once again ensure the retention of their top producers. Kenton Shirk, associate director at Cerulli Associates, discusses how management is leveraging deferred comp to stem defections.

What are the latest triggers resulting in advisor moves?

A change dictated by B-D leadership may cause advisors to switch firms, especially if advisors feel their net financial benefits have decreased or their employer is rigidly dictating undesirable new policies. Industry recruiters have told Cerulli that continuous changes to comp structures also have left some advisors feeling they need to work harder to earn the same amount of money. Competitors can use this point of frustration to their advantage when recruiting advisors.

Describe the pros and cons when firms overreach, in terms of comp. 

B-Ds need to weigh the strategic benefits of a new comp strategy with the potential impact on advisor satisfaction.

An example is Merrill Lynch’s introduction of relationship pricing in its Merrill One platform in which a client’s fee considers the total financial relationship with both Merrill Lynch and Bank of America. Over the long term, it makes investor relationships stickier since they might be disinclined to follow an advisor to a competing firm since it means giving up discounts across their wealth management and banking accounts. 

Yet in the short term, established advisors could potentially feel their parent firm is requiring pricing discounts they might not otherwise offer, creating a sense of frustration.

Will cutting the comp on smaller clients be significant enough to impact retention?

Wirehouses have encouraged advisors to drop smaller clients, using measures such as cutting comp on these accounts or requiring advisors to transfer small clients to centralized support models. Some advisors will refocus their efforts on their largest clients. Yet others will see this as too controlling and infringing on the advisor’s freedom to make decisions about their client bases.

For example, advisors might see a small client as an up-and-comer and resent they can’t nurture the relationship. While this one issue alone is unlikely to spur an advisor to switch firms, it could be one of several issues that add up to a larger problem.

Why will advisors with contracts expiring this year consider leaving their firms?

Each year between now and 2019, 12% to 20% of all long-term retention contracts will expire. Advisors and branch managers have expressed to Cerulli a belief that advisor movement will inch upwards as deals expire and advisors are freed from contractual obligations.

It’s unlikely deal expirations will lead to a mass exodus, but once an advisor’s contract expires, it does create a natural pause point for an advisor to consider alternatives.

At a minimum, this is an opportunity for competing firms to knock on doors and find advisors who might be seeking greener pastures.

Will deferred comp work for Morgan Stanley?

Deferred comp seems to be a replacement tool to retain advisors now that retention contracts are expiring. The upside is that deferred comp disincentivizes advisors to leave since they would be forced to give up comp outstanding. This may be less of an issue for advisors switching to another wirehouse and getting a signing bonus to replace that income. But it could be a larger issue for advisors joining smaller B-Ds, or going independent and getting smaller packages.

The downside for wirehouses is that advisors might feel frustrated knowing their parent companies are restricting their comp for the purposes of retention and profitability — and especially if it means less cash in their paycheck in the immediate future.

Ultimately, a strategy that relies heavily on deferred comp or retention bonuses can camouflage an underlying weakness in a firm’s competitive positioning.

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