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What's the Fiduciary Rule’s Effect on Compensation?

March 16, 2017

The Department of Labor’s fiduciary rule has certainly put a damper on broker recruitment deals, but it’s unclear whether wirehouses can keep them down, according to WealthManagement.com.

Compensation packages offered by major brokerages to lure top producers have grown to 300% of a broker’s trailing 12-month production in the early 2000s, according to the web publication. The total was pushed up primarily by growing back-end bonuses, which are paid over seven to 10 years, WealthMangement.com writes.

But after the DOL unveiled guidance October 27 that suggested back-end compensation could be targeted as a conflict of interest under the rule, wirehouses cut those packages overnight, according to the publication. Several large brokerages purportedly reduced their incentive deals by 25%. They now remain between 200% and 250%, according to recruiters, current wirehouse employees and former wirehouse brokers, says WealthManagement.com.

The DOL took no issue with the size of the incentive deals, however, but only with the back-end compensation, Louis Diamond, vice president of recruiting firm Diamond Consultants, tells the web publication. Rather, the wirehouses took the opportunity to lower the bonuses, he says.

Lower incentives make it easier for large brokerages to profit from an advisor, WealthManagement.com writes. And now, says Mike Wunderli of Echelon Partners, it’s unclear what’s going to happen to the compensation deals.

Some large brokerages are already matching a higher percentage of unvested deferred compensation at brokers’ previous firms, WealthManagement.comreports.

Merrill Lynch and UBS will match up to 100% of it while Morgan Stanley will cover almost all of it, Diamond tells the web publication. All of these firms declined comment about broker compensation to WealthManagement.com.

But consultant Bill Willis tells the web publication that matching unvested deferred compensation may not be enough in the long term. In his view, competition for top producers will inevitably push sign-on incentives above 250% once again.

By Alex Padalka
  • To read the WealthManagement.com article cited in this story, click here.