Merrill Lynch’s move away from signing bonuses seen as risky

Wirehouse's new recruiting strategy will focus on hiring and training younger advisers at the expense of signing top producers from rival firms.

Merrill Lynch is taking a big risk on the wealth management unit’s new adviser recruiting strategy — one that could pay off, but just as easily backfire.

As of June 1, the brokerage will step away from the traditional adviser recruitment model, no longer offer signing bonuses for experienced advisers who have at least eight years of industry experience, according to a source who asked not to be identified. At the same time, Merrill Lynch launched a pilot program to focus on recruiting and training younger advisers as a way to grow its wealth management business.

The same source said senior advisors in the firm’s recruiting pipeline prior to June 1 will still receive traditional recruiting packages. And while details are’t yet available, Merrill is developing a new incentive package to recruit experienced advisers, the source said.

“It’s a bold move,” Danny Sarch, founder and owner of Leitner Sarch Consultants, a recruiting firm, said. “If Merrill has confidence in their training, then it makes sense. The question is whether they’re right. And we won’t know for quite a few years.”

The move is similar to one a wirehouse rival, UBS Wealth Management Americas, took last year, when it announced a new adviser compensation plan. UBS said it was going to cut back on recruiting by 40% and shift its focus toward retaining top-producing advisers.

“It sounds to me, with UBS being out there first, maybe some of the other firms are starting to follow,” said Alois Pirker, research director at Aite Group.

Existing signing bonuses could extend into the seven-figure range, depending on an adviser’s level of production, and as such are a “hugely expensive proposition” for brokerages, Mr. Pirker said.

UBS’ and Merrill Lynch’s decisions provide an opportunity for wirehouse rivals Wells Fargo and Morgan Stanley to shift as well, but it also may be tempting for them to go on a recruiting spree, enticing brokers with the large signing bonuses their rivals are moving away from, he added.

This is one of the large risk areas for Merrill Lynch.

“The firm will be hard-pressed to have an adviser join them when there’s the ability of recruiting bonuses from other firms,” said Howard Diamond, chief operating officer and general counsel at Diamond Consultants Inc., a recruiting firm. “[Signing bonuses] are a large reason that influences moves.”

Merrill Lynch launched a pilot program in Chicago to hire young brokers with three to eight years of industry experience. Called Professional Transitional Advisors (PTA), it targets advisers from small regional brokerages, independent broker-dealers, banks and registered investment advisers. The program will eventually be rolled out more broadly outside of Chicago.

The program represents more of a salary-focused recruiting model — recruits get a three-year salary guarantee, as well as access to the compensation grid and bonuses.

News of the new Merrill Lynch strategy was first reported by AdvisorHub.

The strategy represents a concerted effort on the part of Merrill Lynch to shift how it grows its business, developing young talent and using these advisers to replenish the ranks of more senior ones when they retire or depart for another brokerage.

It also seems to be an attempt to address the broader demographic issue in the advisory industry — a lack of younger brokers to replace a larger proportion of older advisers nearing retirement.

“I think the concept of bringing in and retaining and nurturing young advisers is a great strategy,” Mr. Diamond said. “Our industry is aging and graying out, and there’s not enough focus on training, nurturing and trying to help young advisers grow.”

“However, you can’t do it to the detriment of normal recruiting,” he added. “It’s not sustainable. There’s going to be attrition.”

Mr. Sarch sees Merrill Lynch’s Merrill Edge platform, which caters to clients with less than $250,000 in investible assets, as an asset as it steps up its training of young advisers. Merrill Edge can serve as a sort of “farm system” for young Merrill advisers, who can learn about financial planning while helping lower-tier customers, Mr. Sarch said.

“They have Merrill Edge and other firms don’t, so that’s a big advantage,” he said.

But, if the training program doesn’t turn out as envisioned, and young advisers don’t turn into as skilled advisers as was hoped, “it’ll fail,” Mr. Sarch said.