Advisors will make slightly more money in 2010 than they did last year — but then that’s not saying a whole lot, is it? And, going forward, uncertainty — and even pessimism — have many industry observers scratching their heads over what’s next for advisor compensation.
“I was a lot more optimistic earlier in the year than I am today,” says Alan Johnson, who heads Johnson Associates, a compensation consulting practice in New York City. Due to the threat of a double dip recession and the changing regulatory landscape, Johnson believes advisor pay will be only 10 percent higher than in 2009, an abysmal year. He cut his forecast in half when the markets started to tumble again in August amid signs of a faltering economic recovery.
“I try not to get depressed. There are millions here and everywhere else in the world suffering a lot more. I don’t think we should feel sorry for ourselves,” Johnson adds. “I had just hoped it would be better.”
At the moment, the topic of advisor compensation is notable more for what we don’t know than for what we do. As an example, the rumor mill is usually buzzing by early fall with speculation about the new wirehouse payout grids. Not so this year.
Danny Sarch, president of Leitner Sarch Consultants in White Plains, N.Y. reports that wirehouses have put a lid on any payout grid changes until the Securities and Exchange Commission signals what it’s thinking regarding any change in the obligation and standard of care for broker/dealers that provide personalized investment advice about securities to retail investors. The public comment period on the fiduciary standard ended August 31.
“For 2011, it’s clear the wirehouses are waiting for what the final [Dodd-Frank Wall Street reform] legislation will look like. All firms are paralyzed until that happens,” says Sarch. “They have to figure out what their costs are going to be based on regulatory change. It’s really hard to predict now.” One possible revenue source: broker compensation.
“The big question is how will they manage to those changes? It will cost money to make them. Will they take it out of broker compensation? Will advisor compensation be negatively impacted in any way? You hear both,” notes Mindy Diamond, president of Diamond Consultants, a recruiting firm in Chester, N.J. “This is a move that’s going to play out in the next 18 months but the final chapter won’t be written for the next couple of years. The broker will begin to feel the impact, however, sooner rather than later.”
Also in play: the SEC’s plan to eliminate 12(b)-1 fees as they currently exist. Will product manufacturers create some other way to pay their advisors? The issue is generating a lot of interest in the retirement plan arena especially, according to Sean Cunniff, a research director at Needham, Mass.-based TowerGroup. “A lot of retirement plans in the small to mid-size space are sold by brokers and advisors whose compensation often comes from mutual funds or insurance products that are part of the plan,” he observes. “That’s how a lot of the 401(k) providers and in some cases 529 providers build their compensation schemes. If fees are capped, the product manufacturers will figure out some other way to pay their advisors.”
Then there’s the whole drama surrounding the economic recovery. Most advisors are not optimistic that the market will drive growth any time soon, according to Philip Palaveev, president of Fusion Advisor Network. “The level of optimism is very low,” he says.
That uncertainty has helped create a tug of war for wirehouses. On the one hand, notes Palaveev, there’s the shortage of advisors and a fierce recruiting war for stellar talent. On the other, firms are pessimistic about growth and are facing an uncertain regulatory and economic climate that could, potentially, change how they do business.
“Both forces are very strong and they’re pulling in opposite directions,” he adds. “If two forces are pulling in opposite directions that thing in the middle may break. And that thing in the middle is the advisor.”
The Road Ahead
The slam, when it does come, will affect the marginal producer the most. Diamond says firms will be much less willing to tolerate sub-$500,000 producers as they begin to deal with the new regulatory standard. “It will be increasingly difficult and more unpalatable for those advisors,” she says.
But quality advisors, from a functional day-to-day perspective, won’t experience much of a change, according to Diamond.
“Most quality advisors, whether they work for a wirehouse or in the independent space, have been acting as a fiduciary for their clients anyway. Will the traditional brokerage model become more restrictive and compliance heavy? Probably. But if you are a wirehouse advisor and you have been acting pretty much as a fiduciary anyway, and you’re clean and compliant, you’re going to be okay,” she adds. “If the firm comes down with a zillion new rules or regs to prove compliance because the firm needs to manage to the lowest common denominator, that’s when brokers move. That’s what we’ll be watching.”
The likely beneficiary: the independent sector.