On Advice

DOL regulation translates into pay cut for some advisers

Reduction in compensation begs question of whether rule is being twisted to bolster broker-dealers' bottom lines

Jul 20, 2017 @ 12:24 pm

By Bruce Kelly

The Department of Labor's fiduciary rule has morphed into a pay cut for some advisers, who are left wondering whether a reduction in their compensation is being used to bolster the bottom lines of the broker-dealers with which they work.

Sure, it would be rather cynical to say that firms are taking advantage of the new fiduciary rule, meant to eliminate potential conflicts brokers face when recommending one product to clients rather than another. The rule is meant to do good for investors, so how could it be twisted to the detriment of advisers?

The brokerage business can be a cynical business. Just think of the dotcom bomb of 2000 and the credit crisis of 2008. In both instances brokers sold securities they didn't understand to chase fat commissions.

So, it's worth asking the question: Are broker-dealers turning the fiduciary rule into a potential profit center?

"I'm calling it a slush fund," said industry recruiter Jonathan Henschen. "The broker-dealers are saying, we want to increase profitability, so blame the DOL."

"What's the haircut going to be for us?" asked Mal Makin, president of Professional Planning Group, a wealth management firm affiliated with Raymond James Financial Services Inc. "I don't know. But it's probably not going to be that bad.

"I don't know if anybody really knows, because getting paid more or less is not the issue," he said. "The issue is coming into compliance with the DOL."

This summer, two of the most prominent firms in the financial advice business — LPL Financial and Raymond James — have said they are trimming compensation to advisers. The changes are fresh, so reps and advisers like Mr. Makin have yet to experience their financial sting.

Large brokerage firms have spent millions to pay for compliance and oversight to put the fiduciary rule in place. So, why shouldn't they alter advisers' compensation and regain some of those losses? On the other hand, are those firms risking ticking off a number of advisers only to watch them bolt to a competitor once the pay cuts sink in?

Before going any further, let's review the reductions in compensation we know about.

LPL Financial recently said it was eliminating a "general securities bonus" applicable to the volume of equities and fixed-income securities traded by an adviser, according to two sources who asked not to be named. This LPL bonus that is being eliminated went to a small number of veteran advisers who built portfolios through the buying and selling of individual securities, according to an LPL branch manager. The majority of advisers at LPL buy and sell packaged products like mutual funds or variable annuities for clients.

Meanwhile, Raymond James & Associates, an employee broker-dealer unit of Raymond James Financial Inc., this month told its 2,500 reps and advisers that many of them would get a 1% cut in pay starting at the end of September.

Raymond James employee advisers producing more than $300,000 in annual revenue would see a reduction in payout of "just 100 basis points," according to a memo sent to advisers from Tash Elwyn, president of the private client group at Raymond James & Associates.

That means an adviser who generated that specific amount of revenue — $300,000 — would experience a $3,000 pay cut.

Raymond James Financial Services, a broker-dealer for independent reps, also made changes, but the details have yet to emerge publicly.

In a statement, Raymond James Financial Services simply said that "to comply with the DOL's fiduciary rule conflict-of-interest provisions and other evolving regulatory expectations, Raymond James Financial Services is modifying its branch payout structure over the coming months. The changes represent the first significant payout modifications in more than two decades."

Some advisers recognize the predicament the DOL rule puts broker-dealers in, so they sound rather stoic when describing the pay cuts. Was Raymond James using the DOL as an excuse to cut compensation? I asked one veteran independent adviser.

"I don't know. Could be. Probably," responded the adviser, who requested not to be identified. "It's a slight pay cut and doesn't seem egregious. It could be a few percentage points."

It's unclear whether firms like Raymond James or LPL could use the DOL fiduciary rule as an excuse to grab revenue from advisers and increase their bottom lines. It's cynical to think so, but this is the brokerage business.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Events

WisdomTree's Maute: Developing elegant tech-enabled solutions

Advisers need unique technology-enabled solutions in order to have more time to expand their practice, according to WisdomTree's Alisa Maute. What can be done today to create a more thriving business of tomorrow.

Latest news & opinion

Meet our 2017 Women to Watch

Introducing 20 female financial advisers and industry executives who are distinguished leaders, advancing the business of providing advice through their creativity and hard work.

Raymond James executives call on industry to keep broker protocol

Also ask firms to pay for the administration of the protocol to 'ensure its longevity and relevance.'

Senate committee approves tax plan but full passage not assured

Several Republican senators expressed reservations about the bill, and the GOP cannot afford too many defections.

House passes tax bill, focus turns to Senate

Tax reform legislation expected to have more of a challenge in upper chamber.

SEC enforcement of advisers drops in Trump era

The agency pursued 82 cases against advisers and firms in fiscal year 2017, down from 98 the previous year.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print