When it comes to compensation, most advisors will be delighted to put 2009 in the rear view. After all, industry experts are predicting that advisors will pocket up to 25 percent less than last year — no matter how you get paid. Commissions, fees — in this market, there’s no place to hide.
“They’re going to be feeling it,” notes Alan Johnson, who heads Johnson Associates, a compensation consulting practice in New York City. “While we’ve averted a catastrophe, we’re still below 2008, even if we have a great second half of the year. You’re going to be down, and that’s no surprise to the broker.”
But enough of looking back. What’s more important is what lies ahead: a changing landscape, driven by a tougher fiduciary standard, that could change the way products are marketed and sold and how brokers are paid. It’s not unthinkable that the controversial move to a higher fiduciary standard for brokers who give investment advice could come by the start of the year, according to many industry observers.
“The word ‘risk’ is all over. If you look at regulators around the world, one of the things that’s very consistent is they believe the pay system should not encourage excessive risk,” said Johnson. “Does the pay system encourage the recipient to take inappropriate chances? As you get to the advisor level, it’s a question that will continue to resonate.”
And the Obama administration’s focus on regulation doesn’t stop there. “The industry as a whole is waiting for the other shoe to drop,” according to Bing Waldert, a director for Boston-based Cerulli Associates. “It’s only a matter of time.” Among the practices Waldert says are sure to come under scrutiny: retention bonuses and recruiting packages.
Waldert was right. On August 31, SEC Chairman Mary Schapiro in a one-page open letter to broker-dealer executives warned them about offering substantial inducements to potential recruits, including large up-front bonuses and “enhanced commissions” on sales of investment products. “Certain forms of potential compensation may carry with them enhanced risks to customers,” she said pointedly in the letter.
At the least, the market meltdown and the regulatory climate have put the compensation conversation into high relief. “I think the world has changed,” says Danny Sarch, president of Leitner Sarch Consultants in White Plains, N.Y. Among other things, Sarch expects “dramatic” changes in the 2010 compensation grids that will be unveiled over the next few months. In his forecast: a continuing focus on higher producers, a drive toward “product neutrality” and rewards for converting to a fee-based business model.
“Payout plans have always been used to drive behavior. If you believe, as I do, that there’s going to be a change to fiduciary, you must continue to drive business to a fee-based model,” Sarch says. “I also think they will continue to raise the bar so that the higher-end guys will be taken care of. The lower-end guys, by definition, will lose.”
Likewise, Mark Elzweig, president of Mark Elzweig & Associates in New York City, expects higher levels of compensation in the 2010 grids for brokers with good assets who do in excess of $500,000 in production. The back story, he says, involves how the wirehouses will deploy their “scarce” resources.
“Even if they’re not actually firing you, they’re making it clear that they want you to leave,” he said. “There have been mergers of big firms, overhead is rising, money is scarcer than it used to be, and if you want to stay at a major wirehouse, if you’re grossing $400,000 or more, you can stay. Of course, they want you to do $500,000 or more. Otherwise, they’re saying, your revenue doesn’t justify our overhead and you should leave.”
What of the perks that once were part of so many Wall Street packages? They haven’t exactly disappeared. Early this year, UBS introduced a Financial Advisor Survivor Benefit, under which the company will give 75 percent of a high producer’s gross to your survivor, up to a maximum of $2.5 million. More traditionally, there are still incentive contests and high producers continue to be sent on trips.
“It’s very quiet now but it exists,” says Elvin Turner, managing director of Turner Consulting in Bloomfield, Conn. “Compensation doesn’t have to be stellar but it has to be rewarding. That’s probably something that will never change.”
Not surprisingly, the events of the last year have exposed the weaknesses in both the transactional and advisory business models.
“What happened in the fall and into the spring was scary. People stopped trading and wanted to talk — and that’s across the board,” said Turner. “You can get paid for talking or you can talk for free and just kind of hang on and wait for people to trade. That’s what’s been going on.”
Going forward, Turner expects the “talking” model to gain traction not so much because of organic growth, but as a result of assets migrating from the traditional model. A Cerulli Associates report in July notes that wirehouses lost approximately $1.5 trillion worth of market share in 2008 while independents gained ground.