Wachovia stops offering profit-formula deals

Wachovia Securities last month stopped offering recruitment packages to potential recruits to its profit-formula platform.

Profit-formula representatives are employee brokers who work in branch offices of Wachovia Securities LLC of St. Louis. They pay a pro-rata share of branch expenses in return for a higher payout.

Sources said that Wachovia’s new owner, Wells Fargo Corp. of San Francisco, may be questioning the profitability of the program — particularly the practice of paying recruiting bonuses to bring on veteran producers.

“I’m sure it has to do with cost,” said Mindy Diamond, president of Diamond Consultants LLC, a Chester, N.J.-based recruiter who placed her last profit-formula client last month.

The profit-formula platform “was a great recruiting tool for [Wachovia], especially for large producers, because they got the best of both worlds — being independent, but with support” from a large firm, she added.

Only brokers producing $1.25 million, or teams doing $1.75 million or more, qualified for the profit-formula program.

Payouts start at 80%, recruiters said, a bit lower than other independent firms where reps typically get 90% or more of their production.

There are about 350 brokers in the program.

Until last month, Wachovia was “doing a standard [recruiting] deal” for profit-formula brokers, said industry recruiter Rick Peterson, president of Rick Peterson & Associates of Houston.

Ms. Diamond, on the other hand, said that profit-formula recruitment offers were a “little lower” than Wachovia’s regular package.

END OF THE LINE?

The end of the recruitment deals has sparked some speculation that Wells Fargo might want to get rid of the profit-formula platform entirely, which could lead to an exodus of big brokers, observers said.

The platform was an interim step created in the mid-1990s to retain top producers who were thinking about going independent, said Keith Gregg, a former national sales director with Wachovia Securities Financial Network LLC in Richmond, Va.

“At the time, it worked out fine,” he said. “But my guess is that it’s no longer the pacifier” the firm needs to retain brokers, since Wachovia now offers an independent channel through Wachovia Securities Financial Network LLC.

Finet is still recruiting brokers, sources said.

In a statement, Wachovia Securities spokeswoman Teresa Dougherty said the firm is “scheduling transitions” to profit formula for existing advisers now that the firm is completing its technology conversion. She declined to comment further.

One Wachovia rep, who asked not to be identified, said the firm stopped internal transfers to profit formula after the firm merged with A.G. Edwards & Sons Inc. of St. Louis in 2007.

TIGHTENING UP OFFERS

Separately, Wachovia has tightened up on its recruiting offers by factoring a broker’s trailing three months’ production into the deal.

The firm is looking at a recruit’s trailing three months, and multiplying by four to project the next year, recruiters said. If that figure is less than 85% of the actual trailing 12 months, Wachovia will use the lesser amount as the basis of a deal.

“If [the recruit] is falling off a cliff like a lot of people are, the deal [will be less],” said recruiter Bill Willis, president of Willis Consulting Inc. in Palos Verdes Estates, Calif.

“If the losses are nominal instead of catastrophic,” Wachovia will use the trailing 12 months’ production to structure a package, he said.

Brokers who are experiencing more severe drop-offs in business might see a Wachovia recruitment package with more incentives on the back end, Mr. Peterson said.

Recruiters say that retail revenue in the industry is off 20% to 30% from last year.

First-quarter comparisons are even tougher, Mr. Willis said, with revenue down about 35% across the industry.

Recruiters say that other firms aren’t yet using trailing three months’ production in setting re-cruitment deals.

But “everybody is looking at the trailing three months, not necessarily to calculate a deal, but trying to understand the nature of business they’re getting,” said recruiter Mark Elzweig, president of Mark Elzweig Co. Ltd. of New York.

E-mail Dan Jamieson at [email protected].