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Advisors Stressed By Less Pay

SuperUser Account posted on July 11, 2011

By Danielle Sottosanti July 11, 2011

First in a three-part series on issues facing advisors.

Financial advisors are concerned about regulatory reform and increased compliance burdens. But pressure on their compensation remains their biggest concern.

Those are among the findings of a FundFire survey that asked advisors about the challenges they face, the support they need and their firms’ strengths and weaknesses. More than 185 advisors from some 25 firms participated in the 12-question survey.

Respondents came primarily from the wirehouses, though with ample representation from independent broker-dealers, regional brokerages, registered investment advisors (RIAs), insurance companies and banks as well.

Roughly 27% of advisors said downward pressure on compensation is the financial advisory industry’s top challenge today. That also was the most popular response in a similar survey of 141 advisors last year.

“The amount of increased compliance, along with the decrease in compensation, is a huge challenge,” one bank advisor writes in the confidential survey.

Another bank advisor says reduced payouts, along with an increased grid level to maintain the same payout, are having a negative impact. Also at issue is that there’s “no consideration with respect to [the] worst economic climate/investor sentiment since [the] Depression,” this advisor says.

Industry experts are not surprised that compensation pressure remains a top concern among advisors.

“It is what I would expect,” says Rick Rummage, president of The Rummage Group, a career consulting and executive search firm. “As a whole, bigger companies are constantly reevaluating how they compensate financial advisors.”

Compensation package revisions have taken varying forms. Earlier this year, U.S. Trust was reported to be reworking compensation packages to include provisos that advisors increase new client recruiting in return for discretionary bonuses. And Merrill Lynch also modified its compensation system in a way that reduces compensation for advisors who have more than 10 years of experience but only produce $225,000 a year, as reported.

Advisors who are disgruntled with their compensation have options, of course, including joining another firm. But many factors – from retention packages to fear of losing clients – may hold them back, Rummage notes.

Mark Elzweig, president of the executive search firm Mark Elzweig Company, emphasizes that lower producers, typically those in the $300,000 range or less, have been most affected by changes in payout grids at wirehouses.

“Firms are fiercely competing for higher-end advisors, so no one would be foolish enough to shoot themselves in the brain by tinkering with payouts above that level,” he says.

Indeed, to take just one example, Morgan Stanley Smith Barney has been forced to keep compensation high for top advisors, if only to stave off talent raids from rival firms like Merrill and UBS Wealth Management, as reported.

Besides compensation, advisors are also worried about increased scrutiny from regulators and clients alike.

“It’s just attention from all different levels. You’ve got it from the regulators, and then you also have it from your investors,” says Gary Watkins, partner at ACA Compliance Group. Investors are asking questions about past SEC audits and also the compliance controls that an advisor has in place, he says.

Furthermore, it is becoming more common for the SEC to spend extra time on site when investigating, which can be both daunting and disruptive to advisors, Watkins says.

Another consequence of the financial crisis – a lack of investor confidence in riskier asset classes – remains at the forefront of advisors’ minds. Roughly 17% of respondents said that is their top concern, ranking that response third in the survey. This answer came in second place in last year’s survey as well.

Increased pressure to utilize technology, as well as social media and the inherent regulatory ramifications, also impacted the survey. The biggest challenge advisors face is “compliance restrictions on use of technology to serve a high-tech-oriented market,” one regional brokerage advisor writes.

And a wirehouse advisor says a top need is a greater “ability to make use of social media to attract younger clients.”

Those sentiments arise amid increased scrutiny from both the SEC and the Financial Industry Regulatory Authority regarding how firms are using social media.

The survey finds that advisors believe their firms are not providing them with adequate technology to meet the needs of the day. In fact, 37% said better technology and operations are their top need, up from 29% last year. That has been the most popular response to that question in both last year’s and this year’s survey. Not incidentally, 20% of advisors surveyed said their firms’ largest flaw is a lack of technological solutions to create efficiency.

The financial performance of the wirehouses has improved over the past year, which may account for advisors expressing fewer worries this year about poor leadership and culture. Nevertheless, advisors fear that firms are forcing too many fees upon clients. Indeed, about 23% said it is their firms’ biggest weakness, making it the most-popular response.

And advisors are also concerned about a lack of marketing support from the home office. “The wirehouses have [also] really cut marketing budgets. [Advisors] have less money than they did in the past for marketing and growing their business,” Rummage notes.