As stocks of the large financial services firms get hammered, more brokers could be tempted to leave.
That's because wirehouse brokers have significant exposure to company stock as a result of their deferred compensation and bonus plans. Some have even more stock in their 401(k) plans.
All these plans are intended to serve as golden handcuffs. But the less valuable the stock, the less brokers are locked in. And with more management changes in the offing, wirehouse reps could jump ship, observers say.
Regardless of whether they're looking to move, brokers are concerned about big losses on company stock.
Year-to-date through last Friday, Citigroup Inc. of New York, parent of Smith Barney, was off 37.88%. Merrill Lynch & Co. Inc. of New York was down 41.72%, Morgan Stanley of New York had fallen 18.66%, and Wachovia Corp. of Charlotte, N.C. had dropped 26.21%.
By contrast, the Standard & Poor's 500 stock index was up 2.5%.
"A wealth replacement strategy might be to jump firms," said a Merrill rep on the West Coast, who asked not to be identified. A big producer "could pick up a million-dollar loss in [Merrill] stock by going to another firm," he said.
Reps at Merrill and Smith Barney have been tough to recruit due to their deferred-compensation plans, said a Wachovia manager, who asked not to be identified. But now they're "hugely susceptible" to offers from firms that want to compete for their services, he said.
At Merrill, this manager added, "a lot of reps have their heads up for the first time in a long time."
"I think [other firms] are more apt to recruit" from Smith Barney, said a West Coast rep with that firm, who asked not to be identified. Making up for lost deferred compensation involves a "relatively smaller amount of money now."
Brokers' holdings of company stock are significant. Rick Peterson, a Houston-based recruiter, said deferred packages worth several million dollars are not uncommon.
"We've got guys here with millions in stock," said the Merrill rep.
But losses have been accumulating. "I've got about $250,000 [of Merrill stock] that used to be worth $400,000," said the broker. "And I'm just a small guy."
Still, the news could be worse.
Over the past five years or so, brokerage firms have been offering investment options other than company stock as part of deferred-compensation plans, said Andy Tasnady, founder of Tasnady & Associates LLC, a Port Washington, N.Y., firm that consults with -broker-dealers on compensation.
Merrill and Smith Barney have moved away from stock-heavy plans; Wachovia has offered a mix of investments; and UBS Financial Services Inc. of New York has an all-cash plan, he said.
Morgan Stanley still uses company stock in its deferred-compensation plan, Mr. Tasnady said. The firm also makes its 401(k) match with stock, said a Morgan Stanley rep in the Southeast, who asked not to be identified.
A.G. Edwards reps had significant holdings in company stock, but most have already sold the Wachovia stock they received after the merger was finalized last month, said an Edwards rep based in the Midwest.
"I haven't heard anyone complain" about losing money on Wachovia, said the broker, who asked not to be identified.
The shift from stock-heavy plans is a good move on the part of the industry, Mr. Tasnady said, because firms need a way to retain the troops during periods of unrest. At times of management turmoil and stock price weakness, dissatisfied brokers may be lured to competitors by rich recruitment packages, he said.
"Exactly when you need protection the most is when [stock-heavy deferred pay plans] are least effective" in retaining brokers, Mr. Tasnady said.
Higher concentrations of company stock were more of a problem during the bear market beginning in 2000, he added.
Mr. Peterson doubts that the weakness in the stocks of big financial services companies will cause many more brokers to move.
Brokers leaving now would "have to balance a move with the depressed values" of their company stock, Mr. Peterson said.
Some recruitment packages have offered a stock-for-stock swap, Mr. Peterson said. But brokers are reluctant to change employers if they feel the package will be depressed, he said.
"I own 20,000 shares of Citigroup, so [the stock's fall] impacts me greatly," said one Smith Barney rep in the Mid-Atlantic region, who asked not to be identified. "But where would I go?" This rep, who moved from Merrill several years ago, said Citigroup is better able to weather subprime-mortgage-related losses than Merrill. At press time last week, Morgan Stanley reportedly was also facing several billion dollars of losses on collateralized debt obligations, and its stock sold off as a result.
At Smith Barney, there's some discomfort, said a rep with that firm on the East Coast, who asked not to be identified. "But you're talking to someone who feels the stock is a good value right now."
Dan Jamieson can be reached at [email protected].
