Many advisors expect to see a slight lift in pay in 2012, but with the sluggish economic recovery, ongoing global challenges and relentless cost-cutting, there is little reason to bring out the bubbly.
Compensation expert Alan Johnson frames it this way: “Even if those stock portfolios have rebounded, the scars are still there. Clients are tired. Advisors are tired. It’s been a grind. What I tell my clients is we’re not in a recovery, we’re in a struggle. The market is better, but it’s not nearly as good as we were hoping for.”
New York City-based consultancy Johnson Associates is forecasting a 5-10% bump in compensation for advisors across channels, a downgrade from estimates early in the year.
The continuing drag on compensation comes as the wirehouses continue to cut fixed costs—many of which had helped prop up advisors. “Nickels and dimes are turning into quarters and dollars,” observes Danny Sarch, president of Leitner Sarch Consultants in White Plains, N.Y. “It’s a more subtle way, or insidious way, of taking money out of pocket.”
Wirehouses traditionally have paid the full salary for an advisor’s sales assistant—not any longer, necessarily. Some are also dinging advisors for state registration costs, assorted travel and entertainment expenses, even mobile feed fees.
“Wirehouses are starting to charge a la carte, which puts them in a bit of alignment with the independent sector,” says Alois Pirker, research director at Aite Group, an industry consulting firm in Boston. “But they’ve got to be careful. A $15 mobile fee isn’t going to be the killer, but if you do this consistently, you are going to get pushback.”
Or, as Jeff Spears, co-founder and CEO of San Francisco-based Sanctuary Wealth Services, bluntly puts it: “It’s death by a thousand cuts. In my opinion, and in the opinion of top brokers, it’s an insult to their intelligence. Years ago, when they were making $2 million a year, they were willing to look the other way. Today, with their compensation cut in half, they’re telling me that some of the things I used to not let bother me now really piss me off.”
Sanctuary, an RIA that assists breakaway brokers, produced a much talked-about white paper in June that suggests that the compensation gap between top-tier wirehouse brokers and independent advisors is closing. This year, according to the report, an elite wirehouse broker will make $905,000, not counting a recruiting bonus. That’s down from a high of nearly $2 million during the late 1990s and early 2000s. By contrast, the independent wealth advisor is expected to take home an $875,000 paycheck in 2012.
“Historically, it’s been very different. There’s always been a big discrepancy between what you can get paid on Wall Street and what you get paid as an independent,” says Spears. “The new reality in wealth management is that the glory days of volatile, multimillion dollar paydays are gone forever due to changes in client preferences. Now that it’s getting closer to parity, it’s not the issue it used to be.”
Pricing their services is always tricky for advisors—but there is some evidence that could be changing, at least at the high end.
A new study of independent advisory firms from FA Insight in Tacoma, Wash., shows what principal Dan Inveen calls “significant” movement upward in certain asset under management pricing.
The median asset under management fee for a portfolio of $500,000 to $1 million has remained constant at 1%, he reports. But the $2 million portfolio fee has bumped up from 80 to 88 basis points, and the fee for a $5 million portfolio has jumped from 63-65 basis points to 70.
”I think, and I’m only guessing here, that clients in the $2 million to $5 million range are increasingly demanding more higher touch services that were typically only available to the $10 million and up client,” says Inveen. “There are more exotic asset classes that require other custodial platforms, more need for insurance planning or estate planning. To some extent, it’s like what banks are doing to consumer checking account customers.”
Going forward, Inveen expects to see the asset-based fee combined at times with an event-driven or project-type fee. Some firms already are charging separate fees for financial plans. Others, he said, are instituting retainers to cover the minimum fixed costs associated with maintaining a client account, regardless of asset level.