Reslicing the profit pie at Wells Fargo

If the pie keeps growing, wirehouse brokers probably won’t mind getting a relatively smaller slice.

Because customers are either unaware of the cost or largely indifferent to it, managing other people’s money can be an extremely lucrative business when done at scale. At large brokerage firms and money management organizations, splitting the ample profit pie inevitably becomes an ongoing political and economic tug of war, with management and advisers vying to grab as large a share as possible. As Bruce Kelly reported, Wells Fargo management recently conceded a battle in the profit-pie war to advisers.

Specifically, the firm created a new bonus for current employee advisers who want to migrate to Wells Fargo Advisors Financial Network, or FiNet, its independent contractor brokerage. Brokers who make the switch lose their deferred compensation, which Wells Fargo and other firms pay to retain employee brokers. The new bonus essentially offsets the loss of that compensation, making it more advantageous for reps to stay at Wells Fargo if they want to go independent. Perhaps in preparation for the move, the firm last year changed the compensation structure for branch managers, who had been incentivized to keep producers in the employee channel.

In truth, advisers and management both “won” this battle, as did the firm’s clients, although the latter group was probably taken into account incidentally, if at all. Advisers, of course, now can proceed to independence without forgoing what may be a substantial sum of money. The firm won because it retains advisers and their managed assets, much of which would have been lost to competitors. Finally, clients of the brokers involved won because a move by their adviser to FiNet means staying on the same Wells Fargo platform and not having to close accounts and then open accounts at a different firm and adjust to new systems and procedures.

It’s impolitic but certainly reasonable to ask why Wells Fargo didn’t do this before so many of its brokers left to go independent, or why other wirehouses never even have offered an independent option. After all, Raymond James has had employee and independent channels under one roof for years and the sky hasn’t fallen.

The reason is simple: For other wirehouses, it wouldn’t pay. Part of the reluctance is simply mindset. After years of internal messaging that independent firms are somehow second-rate in terms of products and platforms, it would be awkward for a wirehouse to admit that all of that was, um, an exaggeration. But awkwardness would be a small price to pay if adding an independent channel accessible to employee brokers were more lucrative than the current model. For the wirehouses, it wouldn’t be.

Splitting the ample profit pie inevitably becomes an ongoing political and economic tug of war.

As long as wirehouses keep investing in technology to provide their advisers with the necessary scale to efficiently deliver more products and services to more clients, the employee model will continue to be extremely profitable. Moreover, with Merrill Edge and the huge Bank of America customer base feeding advice-seeking prospects to traditional Merrill brokers, ETrade and Morgan Stanley’s retirement plan business doing the same for its brokers, and UBS about to close on Wealthfront, the upward migration to wirehouse brokers of billions of dollars of investible assets is all but assured. The tug-of-war over who gets what is likely to continue, with management wanting its due for the technology investment. But if the pie keeps growing, wirehouse brokers probably won’t mind getting a relatively smaller slice.