What 2019 Wirehouse Comp Changes Mean for Advisors

Q&A November 15, 2018 at 11:24 AM

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The wirehouse tug of war over control of hiring and retaining financial advisors will see no let-up next year, Andy Tasnady (www.tasnadyassociates.com), consultant to firms on FA compensation plans, tells ThinkAdvisor in an interview.

For 2019, some wirehouses are paying FAs added incentives to stay where they are. These come on top of the withdrawal of Morgan Stanley and UBS from the Broker Protocol in fall 2017 in an attempt to stem FA loss. Signatories to the protocol let departing advisors take essential client information with them. The big question: Will Merrill Lynch also exit the protocol? Tasnady offers his considered opinion.

Next year wirehouses will focus less on recruiting top FAs — and paying them expensive sign-on bonuses to do so — and more on rewarding current advisors for growing their business, thus encouraging them to stay, Tasnady says.

But even as the big firms give, they can also take away: In an unusual move, Merrill Lynch is reducing payout for FAs who fail to achieve minimum growth. And though Morgan Stanley is giving advisors an added incentive to transition their books to the firm when they retire, in order to receive that reward, they must sign an agreement to give 90 days' notice, otherwise known as "garden leave."

Tasnady, based on Long Island, New York, has long specialized in brokerage compensation and counts among his clients Charles Schwab, Citibank, Merrill Lynch, UBS and Wells Fargo. Earlier, the Harvard MBA was with American Express for a decade.

ThinkAdvisor recently held a phone interview with Tasnady to get his insider insights on what the new comp changes mean to FAs.

Here are highlights:

THINKADVISOR: What's the chief focus of wirehouse advisor comp for 2019?

ANDY TASNADY: There are two. One is on growth — bringing in new clients and growing the assets of current clients. The other is, for the firms that have bank products, to boost the lending side of [clients'] balance sheet.

But firms have had those goals for a few years now.

Yes. But they're large ships that turn slowly. It takes multiple years to get big changes to occur. To change behavior, you need to educate people. They need to be convinced. So it's usually a multi-year [effort] and not just compensation [per se] that's going to make it successful.

In general, how do FAs react when their firm makes no changes to its comp plan?

Advisors love no change. Advisors never trust any compensation change. They always think their firm is doing a shell game: "How am I getting screwed?" They tend not to value the upside as much — like, getting an extra $25,000 or $50,000 if they hit certain targets. They usually say, "Why are you taking [such and such] away from the package?"

So, is that how Merrill Lynch advisors feel about the firm's comp changes for 2019? It's giving rewards to advisors who grow their business and also instituting reductions if they don't meet minimum growth levels.

Yes. Advisors always go toward the negative.

What's the biggest comp change wirehouses are making for next year?

They're saying: "We're not going to try to grow just by stealing a couple of hundred people from other firms. We're going to try to grow by making our current advisors more productive and try to keep those that we have. If we don't grow our headcount each year — staying flat or even down a percent — we don't mind."

What's prompted that mindset change?

UBS, for example, said, "We're going to take the pressure off management to grow headcount at all cost. We're at [about] 8,000 advisors. If we go to 7,500 or 7,000 over the next couple of years, we won't fire management because of it."

Why have the firms taken that position?

Because it got expensive. It's ridiculous to pay 300% sign-on deals for advisors. The firms basically said "We're overpaying the people who are jumping firms and not spending enough on the loyal people that remain with us." UBS and Morgan Stanley said, "Why don't we stop paying expensive recruits and instead take the money and put it into things like our [advisor] retirement plan or our grid?"

What's the current comp grid?

On cash, it's usually about 35% to 45%. It can start a little bit less and go a little bit more.

Were you surprised when Morgan Stanley, UBS and Citigroup left the Broker Protocol during the past year?

I was, initially. But some other firms were coming in and out of the protocol — there was some gamesmanship. It sounded like some firms were joining just so they could recruit from other firms: When they wanted to hire someone, they'd sign up. When they were done hiring, they'd get themselves off the protocol so that if someone from their firm left, they wouldn't be in it.

Do you know if Merrill Lynch is going to leave the protocol?

No word on that. They're probably happy with their retention rate by now. So, as long as that stays attractive, I wouldn't be surprised if they'll leave things the way they are.

The wirehouses are trying to spur growth without running into some of the woes that Wells Fargo had on the bank side, you say. Is that a big challenge for the firms?

It can be. Any time you have incentives, you have to be careful to build in protection — safety guidelines and controls — to make sure the minority of people looking for Easy Street don't abuse the intent of the design that's based on good goals.

What sorts of guidelines and controls?

For example, if you're a bank and want more [clients to open] savings accounts, you don't just pay someone to set up the savings account — you have [the client] actually use it by putting in a balance, and you require a client signature. The incentive would be based on the loan account [itself] rather than on whether or not the loan was [merely] set up.

Why and how would an FA start a conversation with a client about taking out a loan?

The role of the advisor today is about helping the client achieve all their financial goals. Those aren't just on the asset side; they might be on the cash-management side or raising money to buy a home. In America, lending is a big part of people's financial picture.

Historically, have firms reduced compensation if FAs fail to grow their business, as Merrill Lynch will do next year?

That's new. There have been reduction policies for not doing things; like, if you brought in an account that was too small. But I haven't seen reduction policies for not growing before.

Exactly what is Merrill's minimum growth level?

It's fairer in 2019 than it was in 2018. In 2018, advisors needed to have three new accounts of $250,000 or above. Now they're moving to something more weighted based on client size. It's more sophisticated and precise. But it's probably comparable [in size] to 2018. You need four credits' worth of new accounts to meet the minimum: four smaller accounts, say, or two large accounts.

Why did Merrill decide to change to a "fairer" plan?

It was based on advisor feedback. Advisors were complaining that they were getting the same weighted credit for a larger account [of investable assets plus liabilities] as for smaller accounts. So the new plan makes the advisors who are bringing in larger clients happier.

UBS reportedly isn't making comp changes for 2019.

If there are any, they would be minor back-office-type things.

They made a lot of big changes about two years ago.

The big firms want their advisors to stay and retire with them. What's a new wrinkle?

Often the wirehouses are willing to provide more if they get something in return. The firms already have incentives for advisors to retire with them and transfer their book of business. But this year Morgan Stanley came up with an added incentive: We'll give you an extra incentive — up to 50% — if you sign a paper agreeing that [when you retire], you'll be on 90 days' "garden leave" — you can't join your new firm during that period.

How does that help Morgan?

It gives them time to contact all [the FA's] clients and introduce the new Morgan Stanley advisor before [the departing FA] can convince those clients to go with [them].

UBS' retirement plan lets retiring advisors sell their book to the firm for up to 300% of annual production.

Right — 300% would be for the very top, larger producers, and it depends on the size and mix of your business. About two years ago, UBS introduced a plan with a pre-retirement incentive — an extra payout upon retirement. [All these programs] are geared toward the largest, longest-tenured advisors.

Why do the firms usually change or tweak their retirement programs every year?

After they put a program out, they learn what's actually happening and revise the incentives based on that and on the marketplace they're competing with. That is, will an advisor [want to] sell their book of business to someone else?

What other consideration goes into the firms' FA retirement plans?

A key aspect is how successful the transition was: Was it smooth? Did the clients stay? Advisors can't just say, "Here's my client list — bye!" It's a multi-year transition of introducing the new advisor and servicing the clients jointly for a year or two. How good a match is the new advisor with the clients? Firms are always measuring client attrition for these retirement transitions, and then they may go back and change the incentives.

To what extent do they change them?

At some firms, the retirement package depends on what percentage of business is kept. For example, if you retire at $100 million [AUM] and two years later only $20 million of assets remain because you didn't do a good job of transitioning your clients to the new advisor, some firms have clawbacks: The retirement package becomes lower than if 100% of the clients were kept.

Why is it often a question of "who owns the clients" when an FA leaves a firm? Sometimes that leads to FINRA arbitration. Why can't "who owns the clients?" simply be black and white when the advisor joins the firm?

Because the reality is gray: Part of the relationship has to do with the reputation of the firm. At the same time, a lot of the service itself is personal and individual. The same advisor might have 10 clients who think absolutely everything comes from the [FA] and would follow them [anywhere]. But there might be 10 other clients with that same advisor who inherited their accounts — and those clients just have always loved the firm.

So you're saying that ultimately, it's the client who decides?

Some advisors are very strong; some are very weak. It's not McDonald's, where everything is the same. ln the end, it's the client's money; and they can do whatever they want with it.

Have the firms changed their deferred comp plans much?

It ebbs and flows. You can get from zero to 5% deferred, typically. Morgan Stanley had more deferred in earlier years but took [a certain percentage] off the table and put it into contingent bonus-type programs, like a growth award: If you grow, you'll get a bonus; if you don't, you'll get zero.

Does Wells Fargo offer deferred compensation nowadays?

They still have deferred, but you don't have to do certain behaviors to get it, like reach a certain lending level or product mix. They [used to have] contingent-deferred. But when they ran into problems with the bank, they said, "Let's take out even any semblance of a potential claim that we're encouraging advisors to do certain behaviors." So here's the [amount] that you get for a particular sales level — and that's it.

When did they make that change?

During the DOL [fiduciary rule] time when there was going to be a lot of heightened claims that if there's any incentive, it means everyone is pushing people into various products. I think that for safety, they decided it was a good idea not to have that type of deferred award.

To what extent are firms trying to get clients to engage in more online activity, and how does that tie into FA comp?

This year — at least at Merrill Lynch — it's starting to bleed into the type of bonus or enhanced payout depending on the proportion of clients that advisors encourage to use electronic service-delivery options [e.g., email instead of snail mail]. It's all about behavioral change for the advisors and also for the clients.

But isn't that giving clients more to do and therefore getting away from full-service brokerage?

A lot of it actually is to improve service. Firms want to automate the low- or non-value-added items to leave more time for higher added-value services — such as advisors spending a half-hour with the client to convince them not to sell when the market is down 10%.

Each advisor's business is so different from the next. Figuring out their comp must be a huge accounting challenge.

It is. You have to model every single advisor and their comp plan, and how a change impacts the advisor and the overall firm.

In addition, to complicate matters, more and more FAs are on teams.

Yes. I see a big opportunity in compensation design for teams. Firms are using a comp system that's geared to and designed for individuals, and they have to contort it to try to make it work for a team. That's very complex on the back end. Every team is different: Some have two people selling and servicing; some have one person servicing, another who's a bond specialist and two others selling [and so forth].

So are firms trying to change team comp design?

It's an emerging area. I'm working on it, but sometimes it's like pushing on a string: Some management just want to keep the business running as it is because something new might take systems work — and it could get messy.

The current way does seem cumbersome, at the least.

It's somewhat of a constraint to be using a compensation system for teams that's based on individuals. So I see an opportunity to come up with a better mousetrap. Put it this way: If you had a clean sheet of paper, you wouldn't build the system that advisors have today.

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