The latest compensation changes being made by Merrill Lynch Wealth Management to encourage brokers to go after wealthier clients could hurt broker trainees, small-market financial advisers and low-end producers.
The most notable grid change is the raising of the minimum account size to $250,000 per household, from $100,000. The firm will continue to pay advisers their retail compensation rates on existing accounts in that range, but advisers will only get a 20% payout on new clients with less than $250,000 in assets. If more than 20% of an adviser's book is comprised of these smaller clients, the firm won't pay at all for new clients below the threshold.
Although all the wirehouses have been pushing their advisers to pursue more-profitable high-net-worth clients, Merrill's move is a not-so-gentle shove in that direction.
“In tough times, profitability is a big concern,” said Alois Pirker, a senior analyst at Aite Group LLC. “This is a clear message to Merrill advisers: Work with bigger clients and produce more revenue.”
For experienced Merrill advisers, who typically have few clients with less than $250,000 in assets, the changes won't have much impact. Such accounts represent less than 6% of total client assets at the firm and generate about 4% of revenue in the wealth management division, according to Merrill spokeswoman Selena Morris.
“Each year, we review financial adviser compensation and make strategic adjustments to ensure the plan is aligned with the interests of our clients, shareholders and advisers, as well as to enhance our leadership position within the industry,” she wrote in an e-mail.
Advisers in the bottom quintile of production and those working to build their books — often by taking on smaller accounts that they expect to build in the future — are the most likely to be hit by this year's adjustments.
“It's not going to affect my paycheck, but we've got a lot of trainees here, and this is going to be tough on them,” said one long-time Merrill adviser, who asked not to be identified.
Trainees aren't the only ones who could get pinched by the changes to the payout grid. Advisers in smaller markets with fewer affluent clients to pursue could also see their compensation take a hit.
“If you're an adviser in Tuscaloosa [Ala.] or Little Rock [Ark.], there are a lot fewer affluent clients to pursue,” said recruiter Mindy Diamond. “To hold advisers in small markets to the same compensation model doesn't seem fair.”
The changes, however, reflect the difficult operating environment for brokerages, Mr. Pirker said.
Margins are shrinking and the costs of serving clients are likely to increase still further with a new fiduciary standard for brokers in the works. Small clients don't bring in enough revenue to compensate for providing them a full-service advisory offering, Mr. Pirker said.
Merrill hopes to move those smaller accounts to its less costly Merrill Edge platform for self-directed investors.
“Regulations and costs are increasing, and profits are down. Clearly, this is a reaction to that,” he said. “Merrill is saying — and rightly so — that they want a bigger book size and they want advisers focused on bigger clients.”
ATTRITION RATE
The raising of the account minimums is for the advisers' own good, according to the firm's research. The change is designed to keep advisers focused on the clients most profitable to themselves as well as the firm.
The attrition rate on small accounts is nearly three times that of larger ones because many smaller clients become dissatisfied with the lower level of service that they get by comparison to larger clients. By discouraging prospecting in the smaller account space, Merrill might reduce the number of bad experiences investors have with the firm.
Although advisers may take on smaller accounts with the expectation that the client will bring more assets to the table down the road, most of the time that doesn't happen.
According to the firm, if smaller clients don't bring more assets to the adviser in the first 90 days, they won't be bringing them at all. In 92% of cases, according to Merrill research, the asset levels remain about the same after a two-year period.
If younger advisers are taking on too many small accounts when they start out, their books won't sustain them when they are cut loose from the four-year training program.
"A LITTLE SHOCKED'
“We were a little shocked when it happened, but I think it's advantageous to both the firm and advisers,” said one adviser in Merrill's training program who, though supplied by a Merrill management, asked not to be identified. “We now know the space we have to focus on and we won't have to restructure our books later in our careers.”
Merrill's move on account minimums has yet to be followed by its large-firm competitors. Morgan Stanley Smith Barney LLC and UBS AG are pushing their advisers to go upmarket, but it remains to be seen whether they decide to follow Merrill's move on new account signings.
“Merrill has always been the pioneer on payout practices,” said Richard McInturff, a recruiter with Wall Street Recruiters Inc. “But I don't know if that will continue to be the case on this issue.”
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