It's my view that we may well remember 2015 as the year that wirehouse recruiting packages topped out. Deals may remain at eye-popping levels for the near term, but future changes will be in one direction only: down.
For the past few years, first- and second-quintile producers have been able to command upfront bonuses of 150% of their trailing 12 months' (TTM) gross commissions — plus potential back-end bonuses that have driven total packages to more than 300% of TTM.
An aging and shrinking advisor population has compelled firms to strike stratospheric deals in order to attract these top-line revenue generators. According to Cerulli Associates, nearly half of all advisors are 55 or older. Their ranks continue to shrink. In the next 10 years, one-third of all advisors are expected to retire.
Meanwhile, wealth management has become more indispensable to wirehouse profitability as other profit centers have faltered.
Dodd Frank has shuttered proprietary trading desks. The low-interest-rate environment has prompted fixed income departments to reduce headcount, as volatile markets have paralyzed syndicate departments, reducing new issues to a mere trickle. A Steady Eddie wealth-management franchise has never been more essential to the financial well-being of wirehouse firms than it is today.
Time Limits
In the winner-take-all, zero-sum game of advisor recruiting, packages have reached their zenith and have remained there for the past few years. A boost in recruiting deals from the current term of nine to 10 years would require advisors to sign on for even more years, so that hiring firms could realize the desired return on their recruiting packages.
Thus far, an aging salesforce has resisted lengthier deals. Many advisors are leery about signing deals that require more than a nine- or 10-year commitment to a new firm. That's especially true of advisors in their later 50s or early 60s, who don't want to sign deals that would tie them up until sometime in their 70s.
In my view, advisor deals have topped out, simply because advisors are not willing to sign the lengthier contracts that even heftier packages would require. But there's another factor putting limits on today's stratospheric recruiting deals: firms need to be generating the profits to pay for them. Right now, wirehouses suddenly find themselves confronting a more challenging environment.
Changed Conditions
Turbulent markets have pummeled stocks and unnerved investors, driving many to the sidelines and reducing firm revenues. Bank of America's Global Wealth Management and Investment Division, which includes Merrill Lynch, reported a 13% drop in net income during in the fourth quarter of 2015.
Morgan Stanley's profits tumbled 74% in the same period — from $1.8 billion in Q4'14 to $480 million in Q4'15. Meanwhile, the pretax wealth management profit margin dipped from 22% and 23% in the two preceding quarters to 20%.
At some point, the seven-year bull market will come to an end. And, of course, Wall Street firms are much less profitable in bear markets. That's because it's not just investors who trade stocks who are spooked by plunging markets. Fee-based clients are less willing to pay for accounts that are underwater.
