It’s not a big secret these days, but we’ll tell it anyway: The financial services industry loves fee-based business.
Or perhaps it’s more accurate to say… it loves recurring revenues. After all, what businessman, given the choice between an income based on individual transactions, each requiring a separate sale, and realizing a stream of income requiring one sale and occasional follow-up, wouldn’t choose the latter?
Registered reps like recurring revenues too (reps capable of changing business models, that is), given the right economic incentives. And that’s where our story lies — in the compensation changes the industry is gradually moving towards to hopefully supercharge production.
“There are four things going on,” says Chip Roame, managing principal of Tiburon Strategic Advisors, the Tiburon, Calif.-based research firm. “Wirehouses, or more captive brokerage models, are paying more for assets under management; they’re paying more for annuitized revenues — which aren’t always the same thing; they’re going after larger producers; and they’re emphasizing multi-product sales.”
Now becoming commonplace, says Roame, is firms moving to a higher grid those producers who attain pre-defined levels of assets under management, or giving a higher payout to reps based on recurring revenues, not only from fee accounts, but from trailers and other “annuities.” “Some companies have been separating grids more and more,” says Roame. “What used to be a sliding-scale grid for small vs. large producers is now more of a geometrical grid with wide divergence between small and large. If you’re a $500,000 or $1 million producer, you may get a hugely higher payout than smaller guys. The message is, ‘We want fewer, bigger brokers.’”
Like Roame, Matt Bienfang, a research director within the brokerage and wealth management practice of research and consulting firm TowerGroup in Needham, Mass., is seeing higher payouts for product bundling or “enterprise selling” — the cross-selling of enterprise products. “If I work in the brokerage unit of a large bank, I’m being incented to put together a package that includes financial planning, mutual funds, stocks, maybe a wrap account and possibly a reverse mortgage. The package is taken into consideration from a grid perspective and reflected in the payouts.” Adds Roame, “The wirehouse might say, ‘If you can sell clients an average of 3.2 products, we’ll call you a wealth management advisor and give you a higher payout for that.’”
Bienfang makes several related observations: “At full-service captive firms, we’re even seeing some disincentives around old-line transaction-based business as well as some firms raising the threshold for minimum production. One large firm even ‘blew out’ 400 recent hires on the realization that the cost to train them would probably never be matched by their ability to gather assets.”
Not all reps who fail to meet wirehouse or IBD production requirements leave the industry, of course. According to a recent production and earnings report based on a survey performed by the Securities Industry Association, 16.8 percent of registered reps were separated from their firms in 2005, with the number as high as 35 percent for new hires. However, only half of separated reps leave the industry; the rest join a competitor and continue trying to make a go of it.
Simplifying Grid Metrics
Reps who produce and stay put must learn to play the game with all its rule changes — a challenge for those more accustomed to the old transaction-based game. For example, to qualify for last year’s highest possible payout, Ameriprise “P2″ reps (that’s Platform 2, or the second of three platforms) were scored according to six metrics, says Bill Williams, senior vice president of the U.S. Advisor Group at Ameriprise Financial in Minneapolis. The problems with this system, responded Ameriprise reps, included a lack of credit for recurring revenues other than those produced by assets under management, and the complexity of the six-factor system.
“Now we have a grid with just two metrics,” says Williams: “Gross dealer concession including trails is one metric; the other is assets under management. The rep plots out on a grid how much GDC and assets under management they have, and these two things determine their payout of anywhere from 74 percent to 91 percent. The payout also gets bumped another percentage point for every 30 plans they write.”
A different Williams tells a similar story. The VP of financial and corporate administration for Raymond James in St. Petersburg, Fla., Greg Williams says, “Everyone’s developing fee-based platforms. With baby boomers retiring, they’re more comfortable with a fee-based service.”
Raymond James designs products specifically for these newer clients and their reps, who are increasingly becoming accustomed to Raymond James’ relatively simple payout grid. Says Greg Williams: “Most fee-based products pay out at 85 percent to 90 percent. The formula is intricate but, ultimately, it’s based on cumulative fees the rep produces in products such as our Freedom or Passport programs.” Freedom is a turnkey portfolio of mutual funds driven by Raymond James’ mutual fund research department, and Passport is a fee-based account tied less to models or mutual funds than individual securities.
Back at Ameriprise, reps still have the option to move up the tiers to P3, which is Ameriprise’s Securities America tier. “We went to our current three-tier system in 2000,” says Bill Williams. “P1 is the employee. P2 is still branded but it’s an independent contractor and gets a higher payout. P3 is the Securities America rep with no access to the Ameriprise brand and support, but more freedom and a payout that averages in the high 80s.”
Support? That’s a major differentiator among Ameriprise’s three tiers. Employees get maximum support and branding. P2 reps get a little less so. And P3 reps get virtually none at all — from Ameriprise, at least. Typical support benefits a P2 could receive are one-on-one coaching to develop a business and marketing plan, or large-case analysis support from corporate experts. The P1 employee is fully supported but only expects to receive a 40 percent to 45 percent payout, whereas a P3, or Securities America rep, gives up P1 support in return for greater freedom and the highest payouts.
But the lines aren’t so clear throughout the industry, says Roame. “Among independent BDs, what’s interesting is their desperation to not be the first to lower their grid. Their compliance costs, marketing costs, technology costs… they’re all going up, so naturally we might have expected to see some grids come down, but no one’s done it.”
What they do instead, says Roame, is add fees. “Some BDs charge a ‘monthly maintenance fee’ to cover these costs.” Bienfang adds, “Fees are going higher, but expenses are becoming unbundled. LPL of San Diego just announced it will pay out 98 percent on investments and business written through the firm by producers at $4 million and above in GDC. This is indicative of what we’re seeing in the independent BD channel as they try to capture advisors with really good books of business. But the flip side is fees and back charges to the reps are offsetting some of the raised payouts.”
Greg Williams doesn’t dispute that there are administrative fees that come out before the payout percentages are realized, whether on fee-based or transaction-based business. “The way we can pay 90 percent on a stock trade is to have the rep first pay a $22 ticket fee. But that’s a fixed fee; the bigger the trade, the more the rep gets paid.”
The next step, says Bill Williams, needs to be simplification. “Many firms are looking for simpler ways to pay their advisors.” Of independent BDs, he says, “The advisors control the client relationships. They have the AUM, which is important to these firms. Reps just want to understand their pay and be incented for growth. But, in doing so, simpler is better.”
It’s hard to argue with that but, according to Bienfang, it’s easier said than done. “[Simplification is difficult because] attribution is difficult. Suppose an institution has a brokerage side and a lending side and Client XYZ refinances his mortgage. How do I first, quantify and, next, remunerate the efforts of the rep on the brokerage side? He owns the relationship but it might have been the institution’s direct mail campaign for mortgage lending that motivated the client in the first place.”
In other words, if the rep in any way increases the revenue from a client relationship over and above what was otherwise expected, the BD wants to acknowledge that through compensation. But how does it accurately measure the contribution of various marketing components within a large organization that encourages “enterprise (cross) selling” and accurately reward the elements most responsible for the revenue?
These are questions the industry will undoubtedly ponder. For the rep, though, simplicity will continue to be a relative term — relative, in part, to their business model. The more independent and entrepreneurial the rep, it would seem, the simpler the payout grid. Run your own show through an IBD, ante up a flat monthly fee for your E&O insurance and marketing support, and earn a 90 percent or better payout. Easy? No. Simple? Relatively.
David J. Drucker is president of Drucker Knowledge Systems; see www.practicelifecycle.com and wwww.virtualofficenews.com for more information on his current projects.