Face it: Americans resent how well industry is paid

The financial services business is out of touch regarding the sensitive issue of compensation even as the American public remains angry at Wall Street bankers for the credit crisis. Bruce Kelly explains.
FEB 20, 2014
Talking about big-time bonuses for bankers, traders and investment adviser reps has turned into a bedeviling matter for those in the financial services industry. Recent conversations about who gets paid what in the business have revealed two things: how out of touch the financial services business is regarding the sensitive issue of compensation and how angry the American public remains at Wall Street bankers for the credit crisis. The continued focus on executive pay is not so much about dollar amounts but the lingering effects of the financial crisis, said Alan Johnson, a leading Wall Street compensation consultant. “The crisis was blamed on the banks, and they're forever linked to that,” he said. People believe “that these firms did me in as a citizen,” he said, adding that some banking executives “are not warm and cuddly, and that's unfortunate.”

Embarrassment

Five years after the Lehman Brothers Holdings Inc. bankruptcy, the issue of compensation in the financial services and financial advice industries remains front and center. A series of unrelated events this month put the spotlight on executive and adviser bonuses, resulting in ripples of embarrassment and ill will across the financial advice industry. The first incident hearkens back to the credit crisis and the general public's ire toward Wall Street firms paying bonuses to executives after a bailout engineered by the federal government.

'Stir public anger'

In an interview last week with The Wall Street Journal, American International Group Inc. chief executive Robert Benmosche said he thought the way some AIG employees were treated was akin to abuses from the civil-rights era. “The uproar over bonuses "was intended to stir public anger, to get everybody out there with their pitchforks and their hangman nooses, and all that — sort of like what we did in the Deep South [decades ago]. And I think it was just as bad and just as wrong,'” the Journal reported Mr. Benmosche as saying. A day after his comments were published, he said that he regretted his language. “It was a poor choice of words. I never meant to offend anyone by it.” The investment advice industry is now dealing with the fallout of regulators' attempts to clean up a pay practice that has the perceived potential of harming investors. The Financial Industry Regulatory Authority Inc.'s board of governors this month approved a rule proposal requiring investment adviser registered representatives to disclose recruitment compensation paid to them as an incentive to move to a new firm. Securities industry regulators have been contemplating such disclosure since the dark days of the credit crisis. In a letter sent to the heads of brokerage firms in August 2009, then-Securities and Exchange Commission Chairman Mary Schapiro warned executives to look out for sales practice problems caused by the “large upfront bonuses and enhanced commissions” that firms were giving to new recruits. Broker-dealers scrambled to pick up brokers in 2009 after the seismic shifts on Wall Street, and some broker-dealers began offering top advisers pay packages that could be greater than 300% of one year's fees and commissions. Much of the bonus was linked to the broker's performance after joining the new firm.

Perceived link

Finra, in its rule proposal, which needs to be submitted to the SEC for review and approval, focuses squarely on the perceived link between such a bonus, usually in the form of a forgivable loan, and an investment adviser rep's sales production. Brokers would need to disclose their recruitment compensation to customers that followed them to a new firm for a year, and firms would have to report to Finra if a rep increased compensation by 25% or $100,000 over the prior year's pay. This information would be used in Finra exams targeting sales abuses that may have been motivated by increased compensation.

Original proposal

Finra made its original proposal on recruitment pay in January. As InvestmentNews reporter Mark Schoeff Jr. reported last week: “The original proposal generated about 65 comment letters and a steady stream of criticism from independent broker-dealers and financial advisers.” “This proposal is truly a solution in search of a problem,” according to one comment letter from a broker-dealer in March. Others noted that Finra hadn't produced a series of enforcement actions that showed abusive sales practices by brokers who got such bonuses when switching firms. And the SEC is also getting into the act, pushing for more disclosure of CEO pay. In a proposal released this month, the SEC wants corporations to disclose how the paychecks of their chief executives compare with the pay stubs of their workers. Financial services and broker-dealer executives don't want to hear it, but the era of more disclosure and transparency about executive and broker compensation is here to stay. The public wants it, so politicians and regulators will see that they get it.

Latest News

Social Security trustees see one less year in insolvency countdown, project shortfall to start 2034
Social Security trustees see one less year in insolvency countdown, project shortfall to start 2034

New report shows dimmed outlook for benefits to retirees and disabled Americans, creating further pressure for federal tax hikes or more borrowing.

NY Republican Stefanik presses SEC to probe Harvard bond sale
NY Republican Stefanik presses SEC to probe Harvard bond sale

Open letter to SEC Chair Paul Atkins questions whether the Ivy League university withheld material information prior to its $750 million taxable bond offering.

Ex-LPL leader re-emerges at The Wealth Consulting Group
Ex-LPL leader re-emerges at The Wealth Consulting Group

The Las Vegas-based hybrid RIA overseeing $8.8 billion in assets has named Andy Kalbaugh president to help scale its advisor platform.

Envestnet extends investment offerings with new alts model portfolios
Envestnet extends investment offerings with new alts model portfolios

The wealth tech giant – in collaboration with Fidelity, BlackRock, State Street, and Franklin Templeton – is offering its advisor and wealth firm users more ways to diversify.

Just as wealth industry M&A was picking up, economic uncertainty could kill it again
Just as wealth industry M&A was picking up, economic uncertainty could kill it again

Deal volume increased post-election but now caution has taken over.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.

SPONSORED Beyond the dashboard: Making wealth tech human

How intelliflo aims to solve advisors' top tech headaches—without sacrificing the personal touch clients crave