The wealth management operation at Barclays may have been a small piece of the British bank's business. But at one point it had become a rising star, one which now appears to be falling.
The deal to sell the wealth management operation to Stifel was supposed to come with 180 advisors managing about $56 billion in offices in 12 cities.
But more than 50 advisors, according to On Wall Street's reporting, have decided this was time to find new firms, or go independent. Meanwhile, the firm's AUM may have dropped by as much as $6 billion, according to On Wall Street's estimates.
The Barclays story is a tale of unintended consequences or, in Wall Street parlance, a story of unexpected correlation.
It was only a year ago that Barclays had about 260 advisors, the most the firm had according to industry watchers. With the exception of about 50 recruits hired right out of MBA programs, most of Barclay's advisors typically generated more than $1 million in gross commissions, several advisors at the firm say, who did not want to be named because they did not have permission to speak publically.
Stifel CEO Ron Kruszewski told On Wall Street that he anticipates the retail brokers who come along with the deal could add anywhere from $200 million to $325 million in top line revenues to his firm.
So what prompted Barclays to go into the deal, or the way I see it, dispose of such a successful franchise? The foreign exchange and LIBOR scandals.
It's similar to the 1998 Russian ruble crisis, when the devaluation of the currency caused cattle futures contracts to fall. This is a similar story. The regulators came in and told Barclays to change its ways, and changing the ways of errant trading desks unexpectedly impacted the wealth management division. Here's how:
A BAD SWAP?
A new compensation plan was introduced, swapping the old commission-based model with a salary plus bonus format. In my view, once Barclays rolled that out, their wealth management division was done.
Advisors who raise and manage pools of client assets expect to be paid a fixed percentage of the commissions and fees that they generate in client accounts. Successful retail advisors relish both their unlimited earnings potential and the fact that through their own ingenuity and hard work, they can control how much they make.
Instead, Barclays introduced a compensation model that paid out about half an advisor's commissions in the form of a base salary, with the remainder to be doled out on a quarterly basis. For example, commissions generated in August would not be paid out until October.
To make matters worse, quarterly bonuses under the new compensation scheme could be tied into how well the advisor was adhering to the firm's stated corporate values. These values could include customer satisfaction or other behaviors like client retention, new account openings or whatever behaviors that the firm chose to incentivize. Barclays has all of this spelled out on its corporate website.
While a salary plus bonus format might be an acceptable compensation system for home office staff or for bank brokers who service the accounts of depositors, it's not something that an entrepreneurial advisor would ever tolerate for very long.
Once Barclays adopted this new advisor compensation system, to my knowledge, they never hired another high-end producer.
Overnight, they transformed themselves from a prestigious boutique gunning for $2 million-plus teams into an organization that virtually no established producer would consider joining.
All retail brokerage firms, no matter how strong their platform capabilities, will always lose some of their advisors to rival firms. Some advisors will have their own particular reasons to jump ship. But once a firm can no longer attract talent from elsewhere, its fortunes spiral downward rather quickly.
When you're running a broker-dealer with only 260 advisors, this kind of recruiting scenario can mushroom. First Barclays was rocked by the LIBOR scandal. In June of 2012, the bank paid out a $450 million fine because its traders in multiple locations were alleged to have to rigged LIBOR rates.
Next came an investigation of Barclays, alleging manipulation of foreign exchange markets that ultimately led to $3.2 billion settlement paid early this year, covering potential legal claims. Just before that, Barclays attempted to cleanse its reputation. The bank decided on a fresh start with the new comp plan, which they called Balanced Scorecard.
Henceforth, all employees, including advisors, would have to demonstrate good corporate citizenship by adhering to a code of conduct measure to qualify for bonuses. The firm's wealth management unit also was restructured into the current salary and bonus format, which relies the same criteria.
An edict literally emanating from far-away corporate owners, made in one fell swoop, transformed how advisors were going to be paid. The reasons had nothing to do with the wealth management unit, or any transgressions that occurred on the retail side of the business.
Barclays Global says it has 140,000 employees in more than 50 countries. So, the fate of a US-based group of only 200-plus retail advisors may not have been of paramount concern to Barclays senior management.
BARCLAYS LAST STAND
On the other hand, the firm had grown the advisor ranks under former CEO Anthony Jenkins and his predecessor Bob Diamond. Barclays was also successfully recruiting high-end advisor teams, both from rival brokerage firms and from private banks.
So, applying a salary plus bonus compensation format to revenue generating retail advisors was counterproductive, if not a spectacular failure. It effectively shut down Barclays advisor recruiting efforts.
This kind of format taps into a primordial advisor fear: An advisor's worst nightmare is that they'll lose control over their ability to determine their own earnings and will be forced to dance to senior management's tune.
As strategic blunders go, the Barclays payout revision ranks right up there with General George Custer's battle plans. Custer made a fool-hardy decision to attack a much larger force of Sioux and Cheyenne Indians, despite the fact that his troops lacked the proper weaponry or back up.
We all know how that ended.
This episode is also a cautionary tale for senior management at major brokerage firms. Periodically, Wall Street is swept by rumors that major firms intend to reduce their compensation costs by moving their advisors to a salary plus bonus format.
In the case of Barclays, you've been warned.
Mark Elzweig is president of Mark Elzweig Co., a New York-based recruiting firm placing financial advisors at wirehouses, regional and independent broker-dealers.