Wells Fargo is slashing bonuses tied to lending from its compensation plan for 2017, though its core pay grid remains untouched, according to the firm.
The move, which comes after months of mounting regulatory scrutiny of the bank due to allegations that employees opened unauthorized accounts on behalf of clients, marks a departure from past years when Wells Fargo incentivized its advisers to ramp up that aspect of the business.
For example, under the current plan advisers at the wirehouse could earn up to an additional $100,000 for growth in lending credits.
"In 2016, we had additional incentives for advisory and lending. We want the 2017 to be centered around the client experience and the growth FAs do," says Erik Karanik, national director for operations for the Private Client Group. "That doesn't mean we are doing anything different. We still believe in quality, full balance sheet advice for clients. It's just not going to be in the incentive plan."
Karanik adds that the firm is still investing in that part of its business in order to serve the full range of client needs.
All four wirehouses have been incentivizing brokers to do more lending. That part of the business has been a key growth engine at a number of firms. Wells Fargo reported that net interest income increased 10% year-over-year to $977 million for the third quarter.
But the practice has also drawn the ire of some advisers who resent what they see as inappropriate or unwelcome sales pressures.
"There are many advisers who really don't want to do much with the bank and who just want to be left alone. So from that perspective, it's good," says a former Wells Fargo adviser who left for another wirehouse and who asked not to be named for fear of repercussions.
Earlier this year, Wells Fargo faced allegations that employees opened about 2 million unauthorized accounts on behalf of clients. The company paid more than $185 million in regulatory sanctions and CEO John Stumpf resigned earlier this year. And last week, FINRA put a call out to former Wells Fargo registered reps, asking if they have concerns about the U5 form that the firm filed following their termination.
Karanik says the changes were driven in part by feedback from advisers, not by issues related to the accounts scandal.
"Our philosophy is the same. We look at all aspects of compensation throughout the entire year. We look at what are the drivers of behavior, what are strategic priorities and what is the feedback from our branch managers and advisers," he says.
Wells Fargo is also changing its small household policy; advisers will get paid a flat 20% rate on household accounts of $100,000 or less. Under the current plan, the figure was $75,000.
'THE GRID USED TO BE END POINT'
Industry insiders are divided as to how big of an impact the changes may have. Andy Tasnady, a compensation consultant, thinks that the impact will not be even across the adviser ranks.
"Most advisers are concerned with the core grid. These awards are directional. Firms use them to accelerate or initiate behavior, but they can have limited impact," he says.
He also says that the small household policy, combined with other incentives to offload smaller clients, may actually help some advisers grow.
"It's about having more time doing a better job servicing your large clients and not clogging up your delivery up with smaller clients," he says.
The wirehouse's new compensation plan is the first to be put under David Kowach, who took the helm of Wells Fargo Advisors after predecessor Mary Mack became the leader of the Community Bank at Wells Fargo.
It's also the last wirehouse to unveil its comp plan changes. UBS broke ranks by rolling out its compensation plan in June, presenting brokers with a much simpler plan than in previous years. The wirehouses typically unveil their plans at the end of the year.
Morgan Stanley increased its grid hurdles by about 10%. Merrill Lynch left its hurdles alone, but will now require brokers to refer two clients to other parts of the bank or face a penalty. The referral does not have to result in business.
Danny Sarch, a recruiter, says long-term tendency among the wirehouses has been to tinker and add complexity to comp plans in an effort to reduce broker pay.
"They have been cutting financial adviser compensation for years. The grid used to be the end point. You do this much business, this is what you get paid. Now it's the starting point," he says. "Deferred comp used to be something they put away as an addition. Now it's money they put away to hold you hostage."
--With additional reporting by Ralph R. Ortega.