Last October, almost three weeks before Merrill Lynch Wealth Management’s Andy Sieg disclosed that his wirehouse’s 2019 compensation plan for advisors included a haircut, his management team pre-emptively attempted to downplay the reduction’s significance.

“There may be slight changes in 2019, but it will be substantially the same growth grid plan,” a top Merrill Lynch executive told reporters in mid-October. Then, in the first week of November, Sieg acknowledged that under the 2019 plan the firm would no longer pay advisors on 3% of their investment-related production credits each month.

Merrill Lynch management’s softening attempts aren’t surprising, given that none of the rival wirehouses unveiled substantive tweaks to their payout grids for this year.

Indeed, the other wirehouses — Morgan Stanley, UBS, and Wells Fargo Advisors — didn’t dare risk tinkering much with 2019 compensation plans, even though that had been their pattern and practice in previous years.

The wirehouses kept grids untouched, arguably in response to another trend: FAs’ statistically-verified willingness to move from the wirehouses to non-wirehouses, regional and independent broker-dealers. All the big wirehouses — Merrill included — reported either shrinkage of or only small increases to their FA rosters by the end of 2018 — a year when their regional and independent rivals all touted growth.

According to statistics aggregated by FA-IQ, the wirehouses’ FA rosters shrank on average 1%, while the non-wirehouses’ grew on average 4.39%. In 2018, Finra reported the total number of broker-dealer registered representatives dropped by less than 1% from the previous year to 629,847.

“There has been a day of reckoning and it is hard for big firms to ignore that there has been attrition — and regrettable attrition.”
Barbara Herman
Diamond Consulting

“There has been a day of reckoning and it is hard for big firms to ignore that there has been attrition — and regrettable attrition,” says Barbara Herman, a senior vice president at New York-based recruiting firm Diamond Consulting.

With the pool of broker-dealer representatives diminishing, and non-wirehouse broker-dealer firms showing they can grab a bigger share of advisors, Mark Elzweig, a recruiter and president of the Mark Elzweig Company in New York, says that the wirehouses “did not monkey with the grids. It’s the story of dogs that didn’t bark.”

In prior years, the wirehouses typically played “a game of chicken” with their compensation grids, taking a few basis points away from FAs in an attempt to spike profits for the firm, but not slashing payouts so severely as to trigger an advisor exodus, Elzweig says. “Some advisors left, but there was an accrual to the bottom line,” he recalls.

But for 2019 the wirehouses, as a rule, made no or minimal changes to their payout grids and some of them, in another break from past traditions, announced they would refrain from making changes months before the year ended. Even Merrill, the exception to the rule, made its 2019 compensation plan tweaks in such a way that “they could say, ‘We left our grid alone,’” Elzweig argues.

Merrill capped the holdback based on 3% of advisors’ investment-related production credits every month at a maximum of $4,000 per month.

For top-ranked advisors, Merrill reduced the fees and commissions used in the formula to calculate their take-home pay by as much as $48,000 annually.

Put another way, those top-ranked Merrill advisors who get 45% of their investment-related production in their pockets receive about $21,000 less under the 2019 plan than they would have under the firm’s 2018 compensation schedules — not a huge change for many.

Given the headwinds for the wealth management industry, Elzweig predicts Merrill, Morgan Stanley, UBS and Wells Fargo will continue to show restraint about reducing FAs' payouts. “Firms are going to be very circumspect going forward before they touch their grids,” he says.

What’s making wirehouse managers more reluctant to play the grid-changing games? These days, wirehouse FAs routinely compare their payouts with those awarded their peers at non-wirehouse broker-dealer firms, which historically have paid better and based pay on less complex and confusing formulas, Elzweig, Herman, and other recruiters say.

The wirehouses have stopped changing their grids because with so many FAs going to regional and independents, “that’s the frame of reference now,” Elzweig says.

The non-wirehouses’ straightforward and often more generous compensation grids tempt some financial advisors to leave the wirehouses and their managers recognize that temptation exists, agrees Bill Willis, president and CEO of recruiting firm Willis Consulting, based in Palos Verdes Estates, Calif.

But other distinctions also are helping non-wirehouse broker-dealer firms pull FAs away from the wirehouses, Willis and other recruiters say. For starters, the non-wirehouse firms — particularly independents, which can be larded with private equity funding — offer sign-on deals to recruits that include lucrative forgivable notes, back-end awards or even income guarantees.

Andy Sieg

The non-wirehouses share another recruiting advantage: FAs perceive the regionals and independents as offering potentially more sway over how they run their business and more respect for their relationships with clients than wirehouse employers, according to the recruiters. “It’s simply a matter of the fact that people want more control of a business, which is really theirs,” Willis says.

When, in 2017, Morgan Stanley and UBS exited the Protocol for Broker Recruiting — an agreement that lets FAs move freely among member firms and gives them the latitude to bring some of their clients' information with them — the two firms sent a neon-lit message to FAs everywhere: They would battle for FAs’ clients if FAs switched firms. Neither Merrill nor Wells Fargo defected from the Protocol pact, but questions about the likelihood of their departures persisted for much of 2018. In many FAs’ minds, those lingering rumors painted all wirehouses with the same brush — as institutions that didn’t respect FAs’ rights as advisory business owners, the recruiters say.

For their part, beyond leaving their FAs' 2019 payout grids untouched, UBS and Morgan Stanley also took steps last year that seemed aimed at countering the negative impressions FAs had formed based on the protocol departures.

Wirehouses want to increase the golden handcuffs and make it scary for advisors to leave.
Danny Sarch
Leitner Sarch Consultants

In October 2018, Morgan Stanley unveiled sweetened post-retirement bonuses for top-tier advisors. Under the new plan, those FAs’ total retirement payouts jump from a previous maximum of 250% of their 12-month trailing production to a new maximum of 350%.

In December, UBS halted a previously-announced plan to link its advisors’ bonuses to agreements that they would refrain from soliciting clients for a year after leaving the firm. UBS managers told advisors that they had “inadvertently” introduced the new non-solicitation language. No such non-solicitation commitments would be required for advisors to receive bonuses in 2018 or “likely” in the future, UBS management said.

Recruiters gleefully welcomed UBS’s U-turn. The about-face at UBS likely reflects that managers there too recognize how many career path options — including moves to regional and independents — exist for FAs, the recruiters say.

The wirehouses are trying to walk a fine line, according to Danny Sarch, president of White Plains, N.Y.-based Leitner Sarch Consultants.

“They don’t want to piss more people off, but they want to increase the golden handcuffs and make it scary for financial advisors to leave,” he says.

Diamond’s Herman agrees the wirehouses’ strategies reflect their managements’ awareness that FAs have options.

“There have been enough changes in the industry that advisors are asking more questions. They have a strong sense that they can do their business anywhere and clients will follow. They allow themselves to look more critically at their own firm,” says Diamond’s Herman.

This is the final in a two-part series examining 2018 advisor rosters at broker-dealers. Data collection and collation by Mrinalini Krishna. Read the first part here.