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.
