Page 40 - Investment Advisor February/March 2023

BROKER-DEALER BEAT

fee-based relationships and move away the cost structure and regulatory land- this trend, including Merrill Lynch,
from transaction-based relationships. scape for delivering brokerage capa- which says it’s 80% team-based. Andy
They started that by increasing payouts bilities has changed. There are said Sieg, president of Merrill Lynch Wealth
for fee-based business and trying differ- to be no changes to products that can Management, recently said he wants to
ent targeted bonus schemes.” only be delivered via brokerage, such go to 100% in the coming years.
For a while, “UBS used to pay +3% as alternative investments, 529 plans, 5. More compensation will be tied
higher grid payout rates for fee-based annuities and institutional retirement, to loans: “Another future trend is on
revenues, for example,” he noted. “Over and, where brokerage is being used to aligning more of the compensation
the years we saw many examples of firms support a broader fiduciary relation- toward the liability side of the business:
also supporting the push to fee-based ship with a client, there will be a more loans and lending,” Tasnady says. “As
[work] through education, products, modest impact. firms are getting increasing amounts of
design, a lot of management products and services from
encouragement push, in “The new comp twist that might be lending, not just asset man-
addition to comp design.” agement, the way people get
As a result, Tasnady said, happening is, rather than paying paid on that is typically very
the “revenue mix at a lot extra for fee-based business, firms different than on asset man-
of firms shifted to be much agement,” he noted.
more balanced and many might be reducing payout rates on “So there might be some
are near 50/50, in a mode more evolution in that it’s
where maybe half their transactional business instead.” not as well balanced,” he
business is fee-based and explained. “Most firms and
half the business is transac- —Andy Tasnady advisors still get much high-
tional.” Top firms, however, er proportional payout on
are “already predominantly fee-based, 4. True team-based compensation their asset management business, which
especially when considering weighted designs may finally happen: Major forms closer to 90% of their compen-
revenue mix, as fee-based revenue rates wirehouses want as much of their sales sation even in firms with full lending
are holding steadier, while transactional forces as possible to consist of “high- products and emphasis.”
business revenue rates (revenue as a end teams doing fee-based business,” 6. Advisor payouts for cash bal-
percent of AUM) continue to fall.” Elzweig explained. “Fee-based busi- ances may increase: The wirehouses
There is one additional factor he ness is viewed as more reliable and “make a nice amount of spread on cash
said is “supporting the shift toward fee- steady Eddy. It generates fewer com- balances but typically haven’t paid
based,” and that is the stricter “compli- pliance issues.” the advisors much if at all for them,
ance requirements with transactional Wirehouse executives also “feel that particularly over the last few years
business.” teams deliver a superior client experi- because interest rates were essentially
3. There will be a potential twist: ence,” Elzweig said. “Clients of teams zero,” Tasnady said. “So they weren’t
“The new comp twist that might be often have a stickier relationship with making as much money on cash bal-
happening is, rather than paying extra the firm. There’s a real shortage of good ances. But now, with interest rates up,
for fee-based business, firms might be producers, so firms want to use longev- the question is might some of them
reducing payout rates on transactional ity bonuses and beefed-up succession reinstate or increase advisor payouts
business instead,” Tasnady explained. programs to encourage them to stay and for cash balances?”
“That’s what Merrill Lynch seems to retire with the home team.” “For example, I think Merrill just
have just done, where they’re reducing Tasnady says he has been“advocating bumped up their payout as part of
the commission credits for transac- to some firms about coming up with true their 2023 on cash balances from what
tional business. So instead of paying team-based compensation designs.” But I understand,” Tasnady said. “I’ve
extra for a fee, they’re paying less for right now, “the whole industry is real- seen this trend in another firm or two
a transaction.” ly using an individual-based commis- in a return to this new higher interest
Sources familiar with Merrill’s 2023 sion and compensation administration rate environment.”
compensation plan said the company design,” he noted. “Almost every credit
plans to reduce commission credits on and payout rate is individual-based. Jeff Berman can be reached at jberman@
certain brokerage products because Some firms are already far along on alm.com.

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