‘Salary plus bonus’ will arrive at the wirehouses

This is part two of a four-part series in which guest author Brad Wales, founder of Transition To RIA makes four distinct predictions for the financial services industry and challenges readers to consider not just if but when they will prove accurate. Read part one.

Here’s my second prediction: “Salary plus bonus” will arrive at the wirehouses, they just won’t call it that.

I am by no means the first to make such a prediction. I will certainly pile on, though, and add some additional thoughts to the conversation.

My prediction is implementing a salary-plus-bonus compensation model will arrive silently via death from a thousand cuts.

First, adviser trainees, call-center advisers, sales assistant-to-adviser program graduates, etc., will simply be paid on a salary-plus-bonus model from Day 1. Once they’re on such a plan, there’s no need to ever have to walk anything back.

Second, existing “grid” advisers will learn of newly implemented rules for whenever they’re on the receiving end of reassigned accounts from departed advisers, sunset succession plans and clients who have outgrown the call center. Want to participate in such asset building? Terrific, you will be paid a flat fee on those accounts, with a possible bonus for growing the relationships further. Hmm, sounds a lot like salary plus bonus, even if not in name. But it will be hard for advisers to say no to such opportunities, as isn’t some compensation better than none?

[More: A new pay model: 300 advisers move, and the entire industry feels the shift]

Next, the grid will be “reimagined.” This will then be communicated under such strained pretenses that the mental gymnastics involved will be worthy of a podium finish at the Olympics.

Under the banner of “simplification,” instead of $1 million producers receiving a 45% payout on all production, they will instead perhaps be “upgraded” to a 100% payout on the first $500,000 in production they do each year. Oh wow, a raise!

But wait, there’s more! The firm will then pay our lucky adviser a one-time 100% payout on any new production brought in during each year. Fantastic, I can’t believe 100% payouts at a wirehouse!

In the first year of implementation, perhaps extending into the second and third year to follow, this will feasibly work out in the adviser’s favor.  But long term, and assuming advisers desire to maintain or grow their income each year (which will require growth in assets to do so), the math will ultimately be worse for them.

And as the sun rises in the east, after the plan has been in place a few years and the dust has settled, firms will start (slowly) penalizing advisers if they are not growing assets by reducing the $500,000 threshold they are paid on.

Think this example is farfetched? Perhaps it is. But it’s not farfetched to believe such financial engineering can (and will) be implemented to slowly but surely effectively implement a salary-plus-bonus structure, even if not in name.

The incentive for the firms is too hard to resist. I’ve spoken to many advisers who, given the firm they’re with or their job title, are already on a salary plus bonus. These are not simply “retail” branch advisers. They are advisers generating millions of dollars in production, often from wealthy clients. When you run the math, many are being paid the equivalent of less than a 20% payout.

Wouldn’t any adviser in this situation would jump ship and leave for greener pastures? Not always. I recall speaking recently with a “private wealth” adviser at one of the large well-known firms. He is on a salary plus bonus. His take-home pay is roughly $600,000 a year — an enviable income for almost any American.

Because of his low effective “payout,” he literally could leave that firm, take less than half of his existing clients with him, come close to doubling his income and also have an asset to sell one day when he eventually exits the profession.

Yet, to my last knowledge, he has not made that move. Why? Because he was living a nice life making $600,000 a year. The opportunity to perhaps make $1 million-plus a year, and have an asset worth millions more as well, was not enough enticement for him to walk away from the “certainty” of a income of roughly $600,000.

“Salary plus bonus” does not necessarily mean low pay. This adviser was making $600,000 per year. But compared to his “grid” counterparts, he is woefully underpaid. His employer is more than happy to pay him this $600,000, knowing how much more is staying in its pocket as a result.

The wirehouse firms understand this dynamic. I am not breaking new ground here. Just wait for their shareholders to catch wind of this opportunity, though. Then the fun will really begin.

Takeaway:  Will this prediction come true? If so, what timeline do you foresee for it?

Brad Wales is the founder of Transition To RIA, a consulting firm focused on helping established financial advisers understand everything there is to know about why and how to transition their practice to the RIA model.