Date: 14-12-2013
Source: The Wall Street Journal
Banks Are Adding Shine to ‘Golden Handcuffs’ in Bid to Keep High-Performing Talent
Financial advisers have traditionally had commitment problems when it comes to their firms. Now, some big banks want to persuade them to stick around longer with the lure of extra pay. Morgan Stanley and Bank of America Corp. are among the companies that have introduced new types of incentive bonus programs for the tens of thousands of advisers in their retail brokerages.
A common feature of these programs, which reward advisers who bring in more business or meet other similar goals, is that advisers must stay with the company for several years to keep their bonuses.
The incentives come at a time when special retention bonuses handed out to thousands of advisers during the 2008-09 financial crisis, when many banks and brokerage operations merged, are winding down. Those came as forgivable loans, with terms of about seven to nine years.
Profits from wealth management have become more important to many banks’ overall businesses and are seen as steadier than, say, those from trading or investment banking. That has heightened the competition among firms for advisers who can bring in significant revenue and who have traditionally been a flight risk.
Last week, Bank of America’s Merrill Lynch brokerage unit introduced a new incentive for 2014 that awards those of its 14,000 advisers who double the revenue they generate in a five-year span. Reuters
Advisers who have built up a profitable “book” of client accounts often like to consider themselves free agents, available to the firm that offers the best terms. Brokerage firms lure them with signing packages, which include an upfront cash bonus in the form of a loan that is forgiven over a period of several years, thus keeping the adviser in place. Bidding wars are common.
In a given year, about one in 10 advisers in the wealth-management industry changes employers, according to research firm Cerulli Associates. It isn’t uncommon for top producers to move several times in a career.
Advisers’ basic pay is based on the fees and commissions they produce: The more they generate, the higher the percentage they keep. Each brokerage uses its own pay scale, which may get tweaked yearly and is disclosed each December. On top of that base pay, the companies offer a variety of incentive bonuses, based on meeting certain business-related targets.
New incentive programs have been emerging in banks’ annual pay plans that require multiyear participation. “I think the firms look at these as another type of golden handcuffs,” said Danny Sarch, a New York-based recruiter for the brokerage industry.
The incentives allow advisers to pocket a portion of new revenue they generate and, as handcuffs go, are relatively economical, noted Scott Smith, an analyst at Cerulli Associates who follows retail brokerages. They are a fraction of the value of the biggest signing bonuses, which can reach 300% of an adviser’s yearly production in fees and commissions. In the case of top producers, those bonuses can exceed $3 million.
As a result, the new incentive pay isn’t likely to stop advisers determined to leave from doing so, but Mr. Smith said it could influence those who are on the fence. “For those on the margin, I think this can be a deciding factor,” he said.
Thus, they aren’t likely to radically alter the adviser marketplace.
“As a best practice, it’s better to focus on retaining rather than recruiting,” Mr. Smith said. And incentive pay could tip the scales for some advisers considering whether to stay with a firm or move, he said.
Last week, Bank of America’s Merrill Lynch brokerage unit introduced a new incentive for 2014 that awards those of its 14,000 advisers who double the revenue they generate in a five-year span. If they achieve this goal and meet certain other qualifications in terms of teamwork, training and client service, they get a bonus worth 10% of that revenue increase. Advisers will receive half of the bonus in cash and the other half in a three-year-deferred award.
One adviser at Merrill Lynch, speaking on condition of anonymity, said advisers’ initial reaction to the plan has been less than enthusiastic. After all, the broker noted, a market slump during the five-year period could spoil a push to increase revenue.
According to John Thiel, head of Merrill Lynch Wealth Management, the new incentive plan is designed to meet client demand for more holistic, planning-focused advice and for adviser teams. “Clients really want to make sure, when they have a question, that there are people there that they know to answer their question,” he said.
For its part, Morgan Stanley, which has about 16,500 advisers, is expanding eligibility next year for a growth award that offers an upfront bonus—a loan that is forgiven over five years. The award was introduced for 2013 and takes into account not only revenue growth but also increases in clients’ loan balances.
Morgan Stanley has other incentive plans that may aid in retention, including a length-of-service bonus that rewards longtime advisers with the firm who exceed a revenue threshold. The firm also offers a bonus for advisers who generate a certain level of annual revenue. Both bonuses are paid partially in stock, which takes several years to vest, and partially in deferred cash.
An increased focus on promoting banking products, including loans, credit cards and checking accounts, is aimed not just at boosting revenues. It also makes clients and their money more “sticky.” The more “bank products” clients have in their portfolios, the less likely they are to leave the brokerage firm, banks say.
Brokerage firms are also placing a greater emphasis on crafting long-term financial plans for clients, as customers with such plans tend to stick around. In its 2014 pay plan, UBS Wealth Management Americas announced that its roughly 7,000 advisers will receive a bigger reward if they create goals-based financial plans for clients.
