# New wirehouse math: Inside the numbers

May 10, 2012 @ 2:06 pm

Let's say you're running your own sales force. You have a certain number of salespeople and a certain amount of revenue. How do you compute the average per salesperson? Well (and I was an English Major), the answer is simple division, right? In the headhunting world, regardless of industry, it's called a “per desk” average. If you have a recruiting firm with 10 desks, and you are doing \$2 million in revenue, then your per desk average is \$200,000.

The Big Brokerage business, however, likes to report its own numbers which mysteriously favor whatever statistic that they are comparing. When reporting the total number of sales people, the Big Brokerage firms count EVERYONE, including rookies as well as other registered personnel. Yet, when they report an average production figure, that number excludes trainees, and the other registered personnel. And the definition of trainee is often extended to a three year Adviser. When do you no longer count as a trainee for the purposes of computing average production? Perhaps it's when the average production is high enough! For bragging rights, they want the average production to be as high as possible and the number of brokers to be as high as possible. In order to reconcile those two things to the naïve analysts who cover the industry, they have a convenient gray area adviser: Registered “enough” to count in the total, but not productive “enough” to count in the average.

I'm told by Morgan Stanley Smith Barney and Merrill Lynch executives that these firms have been gaming these numbers for years. The recent article in Reuters which quotes internal Merrill Lynch reports says that Merrill had 12,107 revenue generating Advisers at the end of 2011 while reporting a total headcount of 16,165. And Morgan reported 13,745 producing brokers in March while having 17,193 total Advisers. I challenge both firms to give a revenue per broker number that makes it clear which number they are using and the criteria it uses to pick that number. Numerators and denominators should not be whimsical when providing facts.

To make a confusing issue even cloudier, Merrill will even game what counts as revenue. Merrill is the only firm that I know of that provides their Advisers with a report that tracks both “revenue” and “production credits.” The Adviser gets paid a percentage of the production credits, while getting NOTHING from the revenue which is NOT production credits. A typical million dollar producer might generate \$1.3 million in revenue. Merrill makes money on that incremental \$300,000; the Adviser does not. Other firms also know that they make money from their Advisers that they are not paid on. But when they report their “production per broker,” they are clearly talking about “production credits,” which has been the industry standard for decades. So when Merrill reports their “revenue” or their “revenue per broker”, which number are they using? Are they deliberately using the higher “revenue” in order to make their Advisers appear more productive?

As the trade press has been reporting, Merrill has lost an astonishing number of Big Producers this year, to all sorts of firms. Yet they reported that their headcount was up. I'm told that they are hiring Merrill Edge Advisers (salary plus bonus Advisers dealing with lower net worth clients given to them by the firm) and trainees by the hundreds. Hmmmm…..Replacing Big Producing Departed Broker with Trainee/college graduate? How could your average Production (or Revenue….you pick, just tell us which you are using) be getting higher?

This English Major with a calculator is confused.

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