Financial advisors expecting radical, across-the-board changes from last year's compensation plans will be largely disappointed. Instead, wealth management firms coming off a banner year are looking to repeat that success by tweaking their comp plans: Thresholds will rise, but ever so little; awards will grow too, if only a point or two.
While each individual change can appear negligible, taken together they add up, and advisors especially at the upper echelons will see more money in 2014. But the modifications are also attempts by the wirehouses and regionals to alter behavior and press for more growth.
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Advisors won't be surprised to learn that firms will push them harder to grow their books. This year's comp plans are again offering big payouts to those who can boost their production and pull in new assets. What may pleasantly surprise, however, is the size of those payouts.
Morgan Stanley's comp plan includes a growth award with five different bonuses in addition to core pay that's based on production. Advisors who meet the award's criteria can receive awards as large as 5% on the revenue they bring in on top of their core comp and a 25% increase in their business development allowance. They can also get a pay boost by growing net acquired assets and expanding their lending business.
"We want to reward advisors who are growing," says David Lessing, chief operating officer, field management, at Morgan Stanley Wealth Management. "It's really where we want to place our bets as a firm."
UBS is also offering rich incentives to advisors who grow their books. The Zurich-based bank has set a higher payout on financial plans that the company introduced last year. This year, the firm will offer its advisors a 50% payout associated with financial planning fees of at least $1,000. It has also increased expense allowances for 2014 to help advisors up their production.
"We want to empower our advisors to build their business," says Jason Chandler, head of the bank's wealth management advisor group, UBS Wealth Management Americas. "In 2013 we saw that really worked and our financial planning fees doubled."
For some advisors, UBS has moved the goal posts, raising thresholds slightly for four grid rates ranging from $250,000 to $750,000 in revenue. But overall, payouts remain high for the industry's largest producers. The share for an advisor with 10 years of service at UBS and a million dollars in 12-month trailing production could reach 52.4% in the form of cash, deferred compensation and year-end bonuses, according to OWS calculations.
These larger payouts and increased expense allowances are intended to further UBS' goals of servicing high-net-worth clients while motivating some of the industry's top producers. "At higher levels of production we are very competitive, if not the best," Chandler says.
The increasing payouts are also an attempt to stem the tide of advisors going independent. In January, a former UBS team of advisors with a billion dollars in assets under management formed IFM Capital Advisors, with the help of Focus Financial Partners. While certainly larger than most advisor teams, IFM isn't alone. Other advisors have left the large wirehouses to join independent outfits such as Steward Partners Global Advisory, which recently recruited two former Morgan Stanley advisors with a combined AUM of $350 million.
But the wirehouses aren't the only ones pushing their advisors to grow. Regional firms have been placing increasingly large pots of gold at the end of the rainbow. Janney Montgomery Scott is rewarding its fastest growing advisors through its wealth builder program. Janney advisors who generate at least $550,000 in gross production in 2014 and meet growth criteria can earn up to 5% of their annual gross production on top of their core compensation.
"Strategically we want to tie the most generous parts of our compensation to our most successful financial advisors," says Jerry Lombard, president of Janney's private client group. "We want there to be incentives for all our FAs to grow their practices. But at the end of the day, we want our top FAs to enjoy well above average total compensation, and we're okay with our below average having some sort of mid-range to just below average compared with their peers at other firms."
At the same time that firms are pushing advisors to cultivate bigger accounts, some companies are placing new restrictions on small household accounts. UBS has raised its threshold for small household assets to $100,000 from $75,000 and limited the exemption to their first three months with UBS, instead of the 12 months under the old policy.
"Consistent with our strategy, we wanted our advisors focused on high-net-worth households and clients," says UBS' Chandler. "We felt that the move from $75,000 to $100,000 was a move in the right direction but not too significant in terms of impact."
Morgan Stanley's small household policy threshold is also $100,000. However, the firm has an exception for clients who have less than $100,000 with Morgan Stanley but more than $250,000 in total assets. If a client gives the financial advisor permission to connect his or her account to One View, an electronic access program that allows the advisor to view the total assets in all the client's accounts, and if those assets total more than $250,000, then Morgan Stanley will still provide a full payout for two years to give the advisor time to bring more of the client's assets under Morgan Stanley management. Morgan Stanley's Lessing says this is also beneficial for the client, since it enables the advisor to provide more holistic advice.
But with the thresholds for small households rising, some industry observers say this will pinch newer, lower-producing new advisors, who need those small household accounts to grow their books.
"I remember as a young broker we thrived on those accounts," says Rich Schwarzkopf, president of Schwarzkopf Recruiting and a former broker. "It's a small account today but maybe it'll be a big account one day."
To achieve their growth objectives, some firms have done more than tinker with their comp plans. Sweeping changes at Wells Fargo are intended to make teams more attractive for the firm's advisors, which the bank believes will also spur growth. The San Francisco-based wealth manager has given teams more flexibility in determining how to portion out team-based awards, making it more attractive for their advisors to band together.
"The new plan allows the team to determine how to weight their goals for things like deferred compensation," says David J. Kowach, president of the private client group at Wells Fargo Advisors.
The impetus for the overhaul came from the advisors themselves. When Kowach became president of Wells Fargo's private client group at the beginning of 2013, he went on a six-month listening tour, meeting with advisors at their offices around the country and inviting many more to his office in St. Louis. Kowach says they overwhelmingly wanted more flexibility built into the firm's comp plan, and it was revamped with that in mind.
Likewise, Merrill Lynch has revamped aspects of its comp plan to encourage teamwork. Advisor teams can earn a 10% boost on their incremental revenue over a five-year period. Sources at the firm acknowledge that large clients prefer dealing with teams because their needs have become too complex for any one advisor to manage.
The Ties That Bind
Advisor payouts are not only getting bigger, they are also tied more frequently to longevity, as firms seek to keep advisors from jumping ship. Says industry recruiter Danny Sarch: "Bottom line, compensation is about changing someone's behavior. That's not rocket science, it's management 101."
Take Morgan Stanley, which offers a bonus based on length of service. An advisor who has been with the firm for 25 years and has annual gross revenue of $2.5 million can earn an additional 4% bonus. A Morgan Stanley advisor with only five years of service at the firm and $440,000 in gross revenue can earn an additional 0.5%, but the payment period is over eight years.
Janney's advisors can earn rich rewards under the firm's wealth builder program, but they only receive the bonus in their seventh year. Financial advisors hired in 2010 or later only become eligible for the award in their third calendar year with the firm.
Raymond James & Associates takes a somewhat different approach to discouraging defections. The firm's comp plan remains unchanged for this year following a major overhaul in 2013, when the St. Petersburg, Florida-based regional implemented changes to simplify how advisors were paid and to make the plan product neutral.
"The goal is not simply to have the highest payout," says Tash Elwyn, president of the private client group at Raymond James, "but to provide our advisors with consistency and fair compensation within the context of a culture of service."
Elwyn says the plan, particularly its simplicity, was well-received by Raymond James' financial advisors, pointing to the firm's low attrition rate of 1.71% among advisors producing in excess of $300,000 annually. That compares with the approximately 10% of all advisors who switch firms on an annual basis, according to research firm Cerulli Associates.
"Our comp plan fits on a single sheet of paper and does not require a calculator to figure out how you're going to be compensated," Elwyn says.
Edward Jones has also refrained from making changes to compensation this year, but takes a different approach to rewarding its advisors than most of its competitors. The St. Louis-based investment house offers many of its advisors partnerships, including bonuses based on overall firm and individual branch profitability. When the market is rising, this can represent a significant portion of an advisor's pay. Last year Edward Jones' top producers earned an average bonus of 18.30% of their gross revenue in branch bonuses, according to documents provided to OWS.
"Our comp program is very competitive, but especially so when you include all the benefits. It's not just the payout. It's the ownership opportunities as well," says James Weddle, Edward Jones' managing partner.
Last year the firm's advisor attrition rate was 9%, slightly lower than the industry average.
Training new advisors and providing opportunities for them to grow has been and will continue to be a challenge for the wealth management industry, particularly as baby boomer advisors enter the latter stages of their careers. About one-third of American financial advisors plan to retire within the next 10 years, according to Cerulli Associates.
Firms are performing a tough balancing act, preparing one generation to step up and another to step aside while still keeping the clients' needs in focus. UBS is expanding an advisor training program it launched last year. Over a two-year period, trainees work under the guidance of a complex director to become wealth planning analysts and then transition to roles as financial advisors, according to documents provided to OWS. Trainees learn how to create financial plans, lead financial planning meetings and counsel clients on how to reach their goals. They also can get a CFP designation. UBS says the program will differentiate its advisors in the marketplace.
"The results of those people are very promising," says UBS' Chandler. "If we see the same success rates, we would expect that in the future all of our advisors would come through that program."
UBS currently hires and trains about 200 advisors per year. That's signifcantly fewer than many of its competitors, but Chandler argues that "we invest a lot more early in their career."
Training new advisors is only part of the response to the wave of retirements. To better cope with the problem of replacing its veteran advisors, Wells Fargo has overhauled its retirement program as part of this year's comp plan redesign. The FA Succession Program, formerly the Sunset Program, now allows advisors more time to prepare for retirement, upping the transition period from three years to five years.
Wells Fargo advisors can now also choose a successor from a much broader geographic region. The company has also changed how it evaluates a retiring advisor's book, raising the maximum valuation from 100% to 160%. And, says Kowach, the firm uses the same calculator to evaluate a retiring financial advisor's book that it uses for recruitment purposes.
"I want them to stay and retire here," Kowach says.
Janney has traditionally taken a different approach to recruiting new talent. The firm offers a bonus to any Janney financial advisor who helps recruit an advisor employed at another firm by providing the initial introduction. The bonus is based on the recruited advisor's production, assets under management and how much of those assets are transferred to Janney.
"We want there to be an incentive for them to start that conversation," says Lombard, president of the private client group.
However, the need for fresh blood has led the Philadelphia-based firm to start its first training program in April. Janney will bring in trainees only from among its support staff. "We're going back to loyal employees who are in support roles, know the business, and giving them the opportunity," Lombard says. The 700 advisor firm eventually hopes to source from 3% to 7% of its advisors out of this program.
Edward Jones has found its own solutions to the twin problems of preparing for the retirement of baby boomers and training the next generation of advisors. Managing Partner Weddle says it's an investment the firm has to make through booms as well as busts.
"It's slow and expensive," he says, "but we can make the decision being a private partnership to invest in the people and process to get them up to speed. Many of our competitors are going to find it difficult to make that same decision."
Edward Jones trains almost all of its advisors, many of whom are career-changers. A mere 5% of Edward Jones' new hires last year came from other firms.
"We are completely different than the industry," Weddle says. "The industry tries to grow by basically recruiting producers from each other. At the end of the day, in my view, that's a zero sum game."
Like Wells Fargo, Edward Jones has a retirement transition plan that allows veteran advisors to share some of their assets under management with a new advisor, passing on some of the smaller households and enabling the senior advisor to focus on his biggest clients in his remaining years.
"It's kinda a four-year transition package," says Edward Jones partner, Phil Owen.
For now, it's something of a golden era for the industry's premier producing advisors. They've helped their clients' portfolios grow and in the process boosted their own production and compensation. But questions remain about where the next star players will come from.
It's a difficult balancing act for both the wirehouses and regionals, trying to train the next generation of advisors while attempting to capture a bigger share of the high-net-wealth pool. Faced with these challenges, firms are opting to experiment on a smaller scale. By tinkering with the comp plans, they hope to improve advisor performance as well as their company. But these changes, like new advisors, will take time to prove their value.