By Steven Miyao Chief Executive Officer kasina
Current wholesaler compensation models have changed little since the mid-to-late 1990s, a period of unprecedented growth for the mutual fund industry in which the emphasis was almost entirely on pulling in new assets.
The market environment has changed, however, with new assets more difficult to come by. This, in turn, suggests that firms should begin immediately to take a new look at how wholesalers are compensated and start to put in place strategies that focus more on building profitable distribution relationships and asset retention.
In a recent study, our firm looked at the compensation models for 15 major asset management firms with collectively more than $2 trillion in assets under management. While most have been reluctant to make any drastic alterations to current models, a few pioneering firms have made changes to emphasize profitability, including the incorporation of net sales components and discretionary bonuses that take into account broader activity measures, in order to ensure that compensation plans drive the behaviors that support the firm's overall strategic goals. We expect to see these trends accelerate over the coming years.
The traditional wholesaler compensation model has been a "bread and butter" arrangement comprised of two components: base salary and sales commission. Under this structure, the base salaries for external wholesalers range from $65,000 to $98,000, rising to anywhere from $225,000 to $500,000 or more when variable compensation is included. Internal wholesalers typically trailed the pack, with a base salary averaging from $50,000 to $60,000, rising to $70,000 to $120,000 when variable compensation is included. This bread and butter model worked well for most firms over the past decade because asset acquisition remained the driving force behind wholesaler compensation.
Today, however, there is a different set of concerns: high levels of asset turnover caused in part by a tendency on the part of wholesalers to gravitate toward "hot" products; the need to build strong adviser relationships through value-added wholesaler interaction; and enhanced regulatory scrutiny, to name just three.
These concerns have created a "survival of the fittest" market, forcing many asset management firms to reconsider the allocation of valuable wholesaler resources. As a result, a few firms have introduced "hybrid" wholesalers over the last few years. These wholesalers are required to generate sales through outbound calls from the home office and typically have a base salary of $54,000 to $65,000, rising to $80,000 to $130,000 when variable compensation is included.
Of course, changing a wholesaler's compensation package is a highly sensitive matter, and one with significant implications for the organization. Understandably, many firms are resistant to changing their models.
Nonetheless, we are starting to see a change among the industry leaders, many of which are experimenting with dramatically different ways of compensating wholesalers. In particular, these organizations are placing greater emphasis on net sales and the overall profitability of a distribution relationship; introducing discretionary bonuses to reward certain behaviors that are strategically consistent with the direction set by the firm; and redefining the role of the internal wholesaler.
The impetus behind these changes has been the growing emphasis on profitability versus productivity. Firms are moving closer to "intelligent distribution," a strategy characterized by a shift in emphasis from sheer assets to profitable relationships. So, for example, some firms are rewarding wholesalers with higher basis point payouts on sales to profitable or strategically important distribution partners. Other firms are withholding commission checks on sales of less profitable products until wholesalers have reached their sales targets for the firm's more profitable products.
One of the more radical changes cited by firms is paying basis points on net sales instead of gross sales to reward asset retention as opposed to asset growth. Opponents to this method typically call attention to the fact that wholesalers lack control over redemptions, whereas proponents argue that this issue can be resolved by ensuring the suitability of sales to advisers. As one executive put it, "If I sell the right product to the right adviser, the one that best meets his or her clients' needs, the risk of redemption is low."
And, finally, a few firms have decided to reward a wholesaler's "best practice" behaviors, such as taking continuing education classes or building effective relationship management skills, with a discretionary bonus, even if they are not top producers. This change has also been met with some resistance, especially from those top producers who succeed in spite of not following prescribed "best practice" behaviors. Nonetheless, senior sales executives are recognizing the benefits of such measures.
As the competitive landscape continues to change, asset management firms are beginning to recognize that the ultimate measure of a successful compensation model is the extent to which it drives wholesaler behaviors that support the firm's overall business objectives. Whether it's a movement to net sales or the incorporation of discretionary bonuses, one thing is certain: a significant change in wholesaler compensation models is on the horizon.
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