From the February 2013 issue of Research Magazine • Subscribe!

Wirehouses Roll Out ’13 Comp Plans

After getting feedback from top advisors, Morgan Stanley said in December that it will share a new stock-ownership plan with reps in 2013. “What is most different [with the latest compensation plan] is that we are giving financial advisors the chance to buy Morgan Stanley stock at a discount in 2013,” said a company official. “This ownership opportunity was highly requested by our most successful advisors and management, who saw these programs in place at legacy firms and wanted it.”

The plan, which is being referred to as a “capital accumulation” program, is available to those advisors and branch managers who have been with Morgan Stanley for at least five years and who have $400,000 or more in fees and commissions in 2012. The firm has close to 17,000 reps and is led by James Gorman.

Advisors able to “meet these hurdles,” can invest up to 25% of pre-tax earnings or $150,000. For every 100 shares purchased, they will receive 20 extra or bonus shares. Those in the firm’s Chairman’s Club need only have been with the wirehouse for three years and can invest up to 25% of pre-tax earnings or $250,000. They will get 25 bonus shares for every 100 purchased. The shares vest immediately and will be distributed on April 15, 2016.

“This is an indication of how much we value advisors,” explained the company official. “While it’s true that lots of firms have deferred compensation, this is at most a three-year vesting program. It’s very aggressive and speedy.”

Experts say the new comp plan may also help Morgan Stanley retain more advisors. In the third quarter, it had 16,829 advisors, down 1% from 16,934 in the second quarter and 5% from 17,661 a year ago.

“The timing of these award programs couldn’t be better for Morgan Stanley,” said Mark Elzweig, a New York-based executive-search consultant, in an interview. “They need to introduce some credible programs to stem broker defections and to prevent their headcount from dropping further.”

The upfront portion of retention awards that advisors received in January 2010 amortize on a nine-year schedule, Elzweig points out, which is considerably longer than the three-year time frame of the new capital accumulation program.

Growth Awards

Morgan Stanley also says it will award bonuses to those FAs with positive growth in net new assets in 2013 and in the top 40% revenue growth category. The wirehouse, which adds that this is the “most lucrative [bonus award]ever offered by the firm,” is structuring the bonus as an upfront load to be paid in full in early 2014 and forgiven over five years.

The growth premium ranges from 2% to 5% of grid revenue with no maximum. For those with net acquired assets of at least $5 million, an award of 5 to 20 basis points of up to $157,500 will be paid. A banking/lending bonus of 35 to 50 basis points is also available for growth in loan balances up to $127,500.

The bonus for total revenue in 2013 will be cut by 2% to cover other adjustments. In 2013, Morgan Stanley will award bonuses ranging from 0.5% to 4.5% on fees and commissions of $750,000 to $5 million.

The company will continue to treat accounts for households with under $100,000 differently than other accounts. But it has not raised this asset minimum, unlike some rivals, a company official said.

The grid rate range of 10% to 20% on managed-account assets held by these households remains in effect. Plus, there is no payout on transactional business tied to these accounts. (Reps will get gross revenue credit for clubs and grid thresholds for such transactions.)

In terms of revenue for non-U.S. residents, Morgan Stanley will cut the grid rate by 10% in 2013 for reps with less than $100,000 in revenue with these clients in 2012. 

“We remain with one of richest deferred comp plans on the Street, even with a 2% reduction,” a company source noted.

The new stock compensation policies should be particularly attractive to the former Smith Barney reps within Morgan Stanley, Elzweig shares. “The old Smith Barney plan, which allowed brokers to accumulate Smith Barney stock at a discount, was very popular,” he said. “Smith Barney worked hard to ensure that most of its top producers were in this plan, and branch managers were charged with selling it to their brokers.”

Still, rivals are expected to respond to Morgan Stanley’s latest compensation moves. “The other wirehouses aren’t going to just sit there and watch their retention awards expire either,” Elzweig added. “We expect that they’ll be introducing their own [new] retention programs, as well.”

Merrill Packages

Bank of America-Merrill Lynch compensation packages for 2013 are a mixed bag for advisors, compensation experts say. On the plus side, retiring advisors can potentially receive between 100% and 160% of their trailing-12-month production over a four-year period, which is up from 70% to 80%. Also, the pay grid stays the same.

However, a new emphasis on flows of certain types of asset flows—namely fee-based assets rather than overall net new money—is not likely to make all of the 17,000-plus Thundering Herd happy. “There is a revision to the bonus plan that could make it actually harder to earn the initial amounts,” said compensation consultant Andy Tasnady, in an interview. “Not all assets count, namely non-fee based assets like cash, bonds and equities that are not in certain wrap arrangements.”

The number of BofA-Merrill financial advisors stood at 17,533 as of Sept. 30, which is down one from the second quarter but up 439 reps from a year ago. These figures include about 1,460 FAs in the mass-affluent Merrill Edge platform and BofA’s Consumer & Business Banking segment.

While lending is now part of the bonus program, those advisors who aren’t likely to do more borrowing “could find it harder to hit” the new targets, Tasnady explained. 

BofA-Merrill says it is focused on “strategic [asset] flow growth by broadening and strengthening client relationships and utilizing the full capabilities of Merrill Lynch and Bank of America.” This includes boosting fee-based assets, banking, lending and other annuitized products to “align client, advisor and shareholder interests.”

Total client balances in BofA’s Global Wealth and Investment Management rose 3% in the prior quarter to $2.3 trillion in the third quarter, led primarily by market gains, as well as gains in deposit balances, long-term assets under management flows and loan balances.

Asset flows to advisors in the third quarter were $3.83 billion, down from $3.99 billion in the second quarter of 2012 but up sharply from $1.93 billion in the year-ago quarter. For the first nine months of 2012, new assets totaled $15.64 billion vs. $10.19 billion in the same period of 2011.

The new growth awards for BofA-Merrill FAs will be available to those advisors who raise assets flows by 10% or more and by at least $5 million. For the first $10 million, the reps will get a bonus of five basis points (or 0.05%). And they get 10 basis points (or 0.10%) for over $10 million and up to $50 million.

FAs topping $50 million in new “strategic” asset flows earn three basis points or 0.03%. Previously, new-asset bonuses were capped at this level.

“The cap of $50 million was hard to hit,” said Tasnady. “But those going north of that now get a nominal amount, so that is at least some reward if you are lucky enough to bring in a $1 billion client.”

Other experts point out that this fee-based push is the name of the game in the industry these days. “Transactional business is acceptable, but it’s not where Merrill and the other wirehouses are headed,” explained Elzweig, in an interview. 

“These payout changes don’t involve major cuts, but really minor tweaks—because it’s too competitive a marketplace,” the expert added. “What they’ve opted to do, instead, is to add incentives for advisors to grow their recurring, fee-based revenue. 

Elzweig is more upbeat about how the fee-based incentives will go over with reps. “These kinds of programs make sense and should be well received by advisors,” he said. “Wirehouses like advisors to do off-grid product like providing loans to clients. It’s profitable business for the firm and creates a long-term bond” between the client and firm.

For advisors leaving after age 55, Merrill has increased the “phase-out” bonus, which should encourage advisors to stay until they retire. “It’s critically important that firm provide advisors with sufficient rewards to hand off their business to younger advisors at their firm,” said Elzweig. “Otherwise, advisors will choose to monetize their own retirements by hitting the bid elsewhere. We’re working with some people like that right now.”

Wells Fargo Tweaks

Wells Fargo Advisors said in December that its core payout grid is generally unchanged for 2013. The biggest shift is that the first $11,000 in monthly fees and commissions for which reps get the lower 22% payout, rather than the higher 50% payout, has been expanded to $12,000 per month.

Also, WFA says, it is adding a new way for reps to earn compensation above the grid, other than through long-term deferred compensation. The award to be rolled out next year will be based on client acquisition, and WFA will receive it by reaching a net-asset-flows target or by obtaining the target for new “key households.”

Those FAs who qualify using the latter method can earn up to $100,000 and can elect to receive the total value of this award and their traditional deferred compensation upfront in cash (via a loan and bonus structure).

“This is the largest potential award we’ve ever had in our compensation plan,” according to a company source. Experts say that Wells Fargo’s shifts should prove positive for its business results. 

As for the core grid change, “This is a consistent, small tweak, which they make every year or so,” said Tasnady. “It affects when their higher [50%-payout] rate kicks in, which started out several years ago as being only after the first $8,000 or $9,000 per month and is getting extended upwards every year.”

Though this “tweak” may not make a huge difference, it could reduce some advisors’ payouts by $3,000 or more a year, the compensation expert notes.

The bigger picture, he says, is that Wells—and other firms like UBS, Merrill Lynch and Morgan Stanley—“are focusing their changes on [specific] behavioral goals for their financial advisors,” according to Tasnady.

In Wells’ case, the aim is to bring in new clients above a certain asset size to improve FA productivity and provide additional financial services. “Like others,” the compensation expert said, “Wells is tweaking and shifting more money toward these behaviors. We see it as efficient way to spend their compensation dollars.”

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