Wirehouse training programs are back

At one time, major brokerage houses ran large, expensive training programs for thousands of young brokers, and now it looks as if they are about to return to that model.

Jun 24, 2017 @ 6:00 am

By Bruce Kelly

Since the financial crisis nearly 10 years ago, luring experienced brokers with big signing bonuses has been the preferred method of hiring at the major brokerages.

Brokers loved it because the bonuses put hundreds of thousands of extra dollars in their pockets. But the Big Four wirehouses — Merrill Lynch, Morgan Stanley, UBS Wealth Management Americas and Wells Fargo Advisors — have never really been comfortable with the practice. It was costly, and the brokers didn't always produce the revenue the wirehouses counted on. And although the bonuses were structured to keep brokers in place for periods of seven years or more, after that many brokers simply moved on to a competitor to collect their next signing bonus.

It wasn't always so. At one time, major brokerage houses ran large, expensive training programs for thousands of young brokers, and now it looks as if they are about to return to that model. But there are questions about whether the industry can train enough brokers to replace all of those retiring, and whether those young brokers are going to be successful enough to fuel wirehouse profits.

"The big firms are all going to have to figure out new ways to bring in new talent," said Louis Diamond, vice president and senior consultant at Diamond Consultants, an industry recruiter. "More advisers are retiring every day and the industry is getting grayer."

Driving the transition from recruiting experienced brokers to training younger ones is the Department of Labor's new fiduciary rule, which requires retirement advice providers to act in their clients' best interests. The DOL made it clear that bonuses contingent on meeting production goals — a long-standing and common measure of recruiting plans — are forbidden under the new rule.


UBS was the first wirehouse to announce that it would reduce its reliance on recruiting experienced brokers, although its motivation seemed more to do with cost factors. A year ago, before the DOL came out with its ban on production goals, the firm said it was going to cut back on recruiting by 40% and shift its focus toward retaining top-producing advisers.

"At current volume and expense levels, this relentless recruiting is bad for the industry," Tom Naratil, president of UBS Wealth Management Americas, wrote last June in an industry trade magazine. "It doesn't provide direct benefits to clients, it detracts from the culture of wealth management firms, and it weighs on the returns we generate for shareholders."

"Relentless recruiting is bad for the industry."Tom Naratil, president ubs wealth management americas

Last month, both Morgan Stanley and Merrill Lynch said they would reduce their reliance on recruiting experienced advisers and put renewed focus on training younger advisers and building staff.

Only Wells Fargo has said it will continue to offer signing bonuses. Reputational damage from a scandal on the retail banking side of its business — the company was caught opening up thousands of customer accounts without permission — has dampened its adviser retention and recruiting.

While Wells Fargo is not abandoning signing bonuses and recruiting, it is also continuing to look to training programs to help fill its adviser ranks.

(More: Wells Fargo's move to boost signing bonuses could give it a lift)

The wirehouse currently has three training programs for new advisers in place. The first and smallest is a traditional brokerage training program; the next enlists existing advisers to mentor and train new advisers; and the last provides trainees with salaried positions in bank branches where they can also earn a bonus. That third program focuses on young advisers serving clients with $75,000 to $250,000 in assets and working on the overall client relationship, said John Alexander, head of Advisor Led West for Wells Fargo Advisors and until recently the head of training at the firm.


Wells Fargo is focused on the mentoring and bank branch programs, both launched three years ago. The program in the bank branches now has 400 licensed trainees. The mentoring program has about the same number of trainees and is looking to hire more, Mr. Alexander said.

Underscoring its commitment to training, Merrill Lynch Wealth Management recently tapped a new executive to oversee a revised effort. Andy Sieg, the head of the firm, this year asked Hong Ogle, who formerly oversaw retail branches in Houston, to serve as head of enterprise adviser development.

(More: Merrill Lynch's move away from signing bonuses seen as risky)

It's a new position and effort at Merrill Lynch, which has been training advisers since 1946. Merrill currently has about 3,500 trainees in its traditional two- to three-year program at branch offices and has licensed 1,600 more over the past three years in Bank of America branches.

"We're hoping to hire a lot of people," Ms. Ogle said. "They can come into the bank and actually go to financial centers and interact with customers and clients."

Because of their ability to place trainees in bank branches where they can gain experience working with clients, both Wells Fargo and Merrill Lynch have a leg up in preparing young advisers who will stick with their firms, executives and recruiters said.

"Merrill Lynch is putting trainees in bank branches, and that's a good way to build relationships," said Mr. Diamond, the recruiter. "Morgan Stanley doesn't have that luxury."

That doesn't mean Morgan Stanley has given up on training, he said. When the firm said in May it was cutting back on recruiting, it also said it intended to hire hundreds of additional wealth adviser associates and digital adviser associates to buttress its branch offices.

"Morgan Stanley recently said it was bringing to the branches these tech analysts who are like trainees," Mr. Diamond said. "They are bringing millennial hires up to speed on new technology, and putting them on big teams with older advisers. The focus is on technology."

Morgan Stanley spokeswoman Christine Jockle declined to comment.

There is no guarantee that any of the training programs will succeed. In fact, if the past is any indication, they won't. Failure was endemic for most of the training programs 20 or 30 years ago. At best, only 25% of young brokers made it through training successfully and stuck with the firm as productive advisers, industry executives and recruiters estimate. At worst, the success rate was half that number. Many new brokers simply couldn't produce enough sales to make the cut.


It also turned out the wirehouses were training their competition: Brokers who failed out of wirehouse training programs often found jobs at regional or independent firms. Many former wirehouse trainees eventually left the brokerage side of the financial advice business to work at stand-alone RIAs, another competitor to the monolithic wirehouse business model.

Industry experts questioned whether this time around would be any different than in the past.

"Firms have been recruiting for years and that was the top priority: Bring in top reps and production," said Dennis Gallant, an industry consultant. "It was costly but it paid off.

"Historically, training program have been hit or miss, with high attrition rates," Mr. Gallant said. "What fills that gap of advisers? Are they traditional advisers or new ones? Financial planning programs at colleges have been successful, but do those kids like prospecting and sales?"

Mr. Gallant is not totally dismissing the wirehouses' efforts. "Organic growth and training new advisers is a high priority for firms, and once they put resources behind it they could get better results," he said. "But it's still going to be expensive."

(More: Morgan Stanley hires techies to train advisers )

Part of the challenge is that Wall Street has more competition for talented prospects. Twenty or 30 years ago, finance majors were lured to Wall Street to become investment bankers and underwrite the latest technology offering. Today, those same kinds of students will head to Silicon Valley, latch on to a venture capital firm and fund that tech startup.

"Now people in college and graduating are the 'We Generation,'" said Mr. Alexander of Wells Fargo. "In the 1980s it was the 'Me Generation.' I started in 1993 at Edward Jones and then Merrill Lynch. There was a little bit of product training and a lot of sales training. That was standard for back then.

"I was a financial adviser and built a book," he said. "I was a product of the old way. You had a network or cold-called. The idea of coming in on full commission right out of the box and being an entrepreneur appealed to me.

"But over time that has become not as appealing to folks," Mr. Alexander said. "And we also want our adviser force to look more like the school picture as far as diversity goes."

Of course, the talk of wirehouses abandoning the bonus system and increasing their emphasis on training could be just that — talk, one veteran industry recruiter noted.

"This truce is going to last for a cup of coffee," said recruiter Rick Peterson. "Someone is going to start looking at head count and assets. Even if you're hiring trainees and getting head count up, and the average assets per adviser are down, it's tough to justify not recruiting. We likely won't see those 350% signing bonuses at the wirehouses, but the firms will have to replenish the ranks."


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