Gross vs. net production: Managing your margins

Gross production, otherwise known as the trailing 12, is the number the industry uses to calculate signing bonuses and eligibility for reward trips. Net pay, otherwise known as the paycheck, is the adviser's take-home pay. Advisers scrutinize both during recruiting negotiations, as they should. What is often overlooked is the difference between the two — the margin. Every adviser creates a margin. And how their margin is reallocated ultimately will affect gross production and net pay.

Wirehouse vs. Independent

Traditionally, independent broker-dealers collect a margin of 12% to 20% to cover expenses. It's up to the adviser to determine how much of the remaining will cover operating expenses and how much will become net take-home pay. At 20%, a $500,000 producer will pay a margin of $100,000 to the B-D. In the wirehouse and regional space, a wider margin of 60% to 65% is collected to cover all the operating expenses and liabilities for the adviser on his or her behalf. Garnishing a 60% margin, the $500,000 wirehouse adviser will net $200,000. Regardless of the business model — wirehouse or independent — an adviser's ability to nurture and grow a book of business is affected by how the margin is managed, reinvested and reallocated.

The questions an adviser should ask are:

1. Was my margin reallocated in ways to help me to attract new clients? 2. Was it reinvested to help me better service my existing clients? 3. Did I receive a fair value for what was paid back to the firm? Bottom line: Understanding how margins are managed is a key component to deciding if the grass is greener or if in fact the adviser is in the right place for growth. Tom Daley is the founder and chief executive of The Advisor Center, a strategic partner to InvestmentNews