Wirehouses Tweak Advisor Pay to Boost New Biz
By Tom Stabile January 7, 2010
Three wirehouses have added incentives to their 2010 compensation plans that reward financial advisors for bringing in new business, but in most cases, little else is changing in the plans. The theme differs from the more dramatic changes that most of the top brokerages implemented in their 2009 plans, some fueled by the market crash and others by industry trends.
The new initiatives use different structures and foundations, but generally aim to pay bonuses to advisors who bring in new client assets, new accounts or additional revenue, or who hit minimum revenue marks. Wells Fargo Advisors, UBS Wealth Management and Morgan Stanley Smith Barney all added such programs to their compensation plans effective this year, withBank of America’s Merrill Lynch brokerage sitting out this round, though it already has some growth incentive bonus arrangements in place.
Only a year ago, most of the wirehouses – which then numbered five before Morgan and Smith Barney joined forces in May – were adjusting payouts up and down the compensation grid and adding temporary incentive programs to help advisors suffocating in a severely deflated market. Most of the firms made permanent changes to their grids, upping payouts for top performers while at the same time cutting the rates – and spreading penalties – for low-producing advisors. Most also introduced “upfront” bonus programs providing one-time payments or forgivable loans to cash-strapped advisors.
While the skew toward top producers wasn’t a new phenomenon, industry watchers said at the time that the level and breadth of changes was notable. This year appears to return to a more normal cycle, with only Morgan Stanley Smith Barney having significant changes, which come mostly because it merged pay programs from the two legacy brokerages into a single plan.
“These bonus programs are enhancements, but not fundamental change,” says Andy Tasnady, managing partner of Tasnady Associates, a compensation consultant based in Port Washington, N.Y. “The bulk of compensation still comes from the core sales levels. And you’re not going to see smaller advisors vault over a top producer just because they added a lot of new accounts.”
Tasnady says the bonus plans generally serve two purposes – to reinforce the corporate push for advisors to grow their books and to provide a rallying point to get advisors back on track after a rough market stretch.
At Wells, the new bonus announced last month comes in a program that gives advisors more pay in their deferred compensation plan if they hit net new asset targets, says Erik Karanik, managing director of branch incentives and cost management for the brokerage. That was the only significant change to the plan this year.
“With all of the changes in the marketplace over the last year and a half, we wanted to show consistency in our 2010 comp plan, which has no changes to the cash payout side,” he adds. “But we also wanted to promote a productivity focus with our program to incent [advisors] to target existing clients and new growth opportunities.”
Tasnady says growth bonuses make sense in this market because “everyone is coming off of a tough year” and most advisors expect to grow their depleted asset bases.
The growth bonus concept is not new, but these programs tend to resurface in down years, says Rick Rummage, a former Morgan Stanley branch manager who now is managing partner of Global Recruiters of Reston in Herndon, Va. “They’re trying to figure out something they can do to get people motivated in the New Year, after everyone went through the perfect storm,” he adds.
But Rummage says the wirehouses have to be careful that they don’t create programs with unattainable goals, as some have done in the past. He recounts one growth bonus plan from a few years ago from which only 10% of advisors could actually benefit. “The brokers were angry,” he says. “The [wirehouses] walk a fine line – if the goals are not realistic or attainable, it could have the opposite effect than what they’re looking for.”
Tasnady says the wirehouses should also avoid making the bonus plans too complex for advisors – or the brokerages themselves – to track the figures necessary to see who is eligible for the reward.
He says growth bonus programs are not really intended as retention tools, or at least won’t do much in that department. The bigger idea is to boost morale and hopefully revenue. “It makes the overall plan a bit more exciting,” he adds.
Tasnady says one theme across the recent plans is that the wirehouses are trying to get more sophisticated in setting up the bonuses by targeting specific behaviors they want to foster, such as adding top-dollar accounts or trying to win greater “wallet share” from existing clients. “The best advisors already have these behaviors, and that’s why they’re successful,” he adds. “These programs are more of a small, clear overemphasis to encourage people who are not quite there or somehow haven’t figured it out already.”
Indeed, Karanik at Wells says the new plan there aims to “continue to align [advisors] with the strategic objectives of the firm.”
Rummage says one other spark for these programs might be recognition by the wirehouses that a favored method of growth – poaching advisors and their clients from rivals – is a bit harder today because each brokerage now only has three peer competitors, and because there are fewer advisors overall at the four top firms. “This is a way to get production up in an environment where recruiting is much harder,” he adds.
Here’s a summary of the wirehouse growth bonus plans:
• Wells Fargo - The new program rewards advisors who bring in a minimum level of net new assets this year with 2% of their annual production paid into their deferred compensation plan, vesting over five years. The plan has four tiers with different targets for advisors based on their length of service, starting with a $500,000 goal for advisors on board two to five years, and topping out with a minimum of $3 million for advisors with 16 or more years of experience. The program replaces a bonus plan that had rewarded advisors who achieved 15% revenue growth year-over-year. The other major change this year was a boost in the expense account for advisors producing $800,000 to $1 million.
• UBS – The firm’s GrowthPlus bonus, the only major compensation plan change, will give a bonus in the form of a seven-year forgivable loan to advisors at the wirehouse for more than five years who top $500,000 in production in 2010 – criteria likely to apply to more than a third of its 7,300 advisors. There are several levels of awards, with the top hitting 65% of compensation, and the payouts start in 2011. UBS declines to provide other details about the program.
• Morgan Stanley Smith Barney – The wirehouse announced several incentive programs last fall that reward advisors for bringing in new business, with some spreading plans available in one legacy brokerage to the other, and others that are brand new to both. One adds 1% to 7.5% higher payouts on production into the deferred compensation plan, vesting in stages over eight years, for advisors who hit specific revenue growth targets. Another gives advisors a bonus on the pay grid that could total up to $315,000 in additional cash compensation for bringing in net new assets exceeding $5 million. And a third, new to both sides, gives advisors – in a structure similar to the net new asset award – the chance to earn another $100,000 in cash for adding $1 million-plus households as clients.
• Merrill Lynch – The brokerage did not announce major changes to its advisor pay plan. It already has an award for advisors who exceed targets for the percentage of their books from accounts with more than $250,000 or the acquisition of new accounts greater than $250,000. That award is payable as 50% in cash and 50% into an account tied to the performance of funds the advisor can select.