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Brokerages toss around ideas about salary for Next Gen advisers

Apr 24, 2014 @ 12:21 pm

By Mason Braswell

Wells Fargo, Merrill Lynch, grid, salary, commissions, trailing 12 month payout
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As the brokerage industry considers replenishing its ranks, some firms are testing new pay models that emphasize salary more than commissions.

“We're trying some things in pilots going on with a lot of success in certain models that look different than perhaps they have looked in the past,” Mary Mack, the head of Wells Fargo Advisors, said at an industry conference in earlier this month. “Our traditional methods of incenting and motivating around grids and money may not be as attractive to a Millennial who wants to make a difference in the world.”

In effort to appeal to the next generation, Wells Fargo and other firms have considered moving incoming trainees away from variable compensation and making salary a more substantial piece of their compensation once they become financial advisers.

“I grew up in the industry when commission was the only way you did it,” Devin DeStefano, managing director for next generation adviser strategy at Wells Fargo, said at the same conference. “We are going to try something different and pair salary with commission over time.”

Trainees at most firms are given a yearly salary of about $50,000 for the first few years of the training program. Those that don't drop out build a client base large enough to sustain them further. Then the guaranteed salary drops to around $25,000 and the rest depends on a payout from commissions.

Wells Fargo spokeswoman Rachelle Rowe declined to provide specific details on how that salary would look if the firm extended it past the first few years or what options the firm was considering because they are still being tested in pilot programs.

“We're testing some things,” she wrote in an e-mail.

The word “salary” has somewhat of a stigma in the industry, according to Ron Edde, president of career consulting firm Millennium Career Advisors. Advisers have shunned the relative security of a salary in favor of the unlimited earning potential offered by variable compensation.

“You're exchanging security for the prospect of a greater income,” Mr. Edde said. “And they don't like that because these people are kind of risk takers to start with and they deal with that all the time.”

The thought, however, is that security is exactly what the next generation needs to stem high failure rates in training programs. On average, only one in four trainees goes on to become an adviser, Ms. Mack said.

The prospect of earning a guaranteed salary would be reassuring to younger advisers, especially during the first few years when they are still building a book of business large enough to generate income, Mr. Edde said. No-call lists have limited the ability to cold call and made it even more challenging, he said.

“It was hard enough to do 20 to 30 years ago,” said Mr. Edde. “It's almost impossible today if they want people to go out and do prospecting with little to no prospect of earning long-term money.”

Even once they leave the training program, lower producers can have a relatively tougher time when paid on the grid. An adviser making around $200,000 in trailing-12-month revenue, for example, may bring home only around 30%, compared with a grid rate of around 45% for million-dollar producers.

Moreover, as Ms. Mack intimated, variable incentive compensation has sometimes borne some negative associations around conflicts of interest. Regulators in Europe have passed laws restricting the ratio of bonus pay to base salary at banks.

Earlier this year, Barclays PLC announced that it was changing the way it paid its U.S.-based advisers. While still using a grid, the firm said it was paying out around half of its advisers' total compensation as a salary.

“I would say it's coming slowly in the U.S. — moving more quickly in Europe and Australia than it is in that U.S.,” said Craig Pfeiffer, a training consultant and founder of Advisers Ahead. “They're all anticipating and making considerations but there are few first movers.”

Some in the industry have also proposed that changing compensation could be more appealing to women and minority advisers. One argument that has been discussed is that women are more risk-averse and more interested in stability in their compensation.

Coming up with a final model, however, will be complicated, especially given the cultural opposition from experienced advisers.

“You're not going to trick them,” Mr. Edde said. “The reason that they are paid so well is because they are paid commission.”

Other questions include whether the salary is fixed for all advisers or whether the firm would allow large variances, how it would apply to advisers on teams, and how long it would last after training, according to compensation consultant Andy Tasnady of Tasnady Associates.

Also, a salary structure could mean that firms have to institute layoffs during down times in the market, Mr. Edde said. Advisers have been mostly immune from layoffs, even in the market downturn, since compensation expenses also fall when advisers generate less revenue.

Mr. Pfeiffer said that firms are willing to take the chance to pay a salary, even if it costs more upfront to support lower producers in the beginning.

“The development period is an investment and not an expense,” he said. “We used to think of it as an expense in hiring someone, but most corporations think about investing in their talent development.”

Mr. Pfeiffer said Bank of America Merrill Lynch was also working on testing some changes to its compensation model for new advisers, although nothing had been announced. A spokeswoman, Susan Atran, said she was unaware of any plans to offer trainees a substantial salary after they leave Merrill Lynch's Practice Management Development Program.

The independent space has already been able to experiment with salary payouts since the changes are smaller scale, Mr. Pfeiffer said.

He added that the models at the wirehouses are still under development and may include moving novice advisers into a salaried assistant portfolio manager position or similar role for a few years before they jump into a commission-based model.

“We're not sure we have the answer yet so we're going to try a number of things,” Mr. DeStefano said. “But one of the core models that we're going to start to test in 2014 combines several components that … will lead us down a different path.”

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