WealthManagement Magazine

Here's the Money

Coming off a year (1996) in which median gross production ($280,989) and broker earnings ($108,064) were at an all-time high, one might think brokerage firms would leave well enough alone. But this year, five major firms have made compensation changes: EVEREN Securities, Edward Jones, Merrill Lynch, Morgan Stanley Dean Witter and PaineWebber.After Aug. 1, 1997, payout for EVEREN's lower producing

Coming off a year (1996) in which median gross production ($280,989) and broker earnings ($108,064) were at an all-time high, one might think brokerage firms would leave well enough alone. But this year, five major firms have made compensation changes: EVEREN Securities, Edward Jones, Merrill Lynch, Morgan Stanley Dean Witter and PaineWebber.

After Aug. 1, 1997, payout for EVEREN's lower producing brokers was cut by one to two percentage points. An internal memo sent to branch offices in April said the pay cut would fund increased investment in technology. But at the same time the cut was announced, proxy statements were released disclosing management's bonuses--including $2 million for President Steve McConahey.

EVEREN also raised the minimum production requirement to $515,000 from $450,000 for two brokers to share an assistant.

Some brokers were not too happy about the cuts. One rep queried for Registered Representative's December '97 Brokerage Report Card Survey said: "Although we're still one of the highest [paid] on the Street, the pay cut rubs me the wrong way. It's the third time in two years," the broker said, noting that "the top guys split a $3.2 million bonus."

Elsewhere, some Edward Jones reps report a rumor that the firm is considering a one-point payout cut that would fund a national advertising campaign for the firm. (A similar program now exists in certain geographic markets.) One Jones broker says there would be some kind of cap put on the amount, but that hasn't been announced yet.

Also, in some Jones offices in larger metropolitan areas, salaries of branch office administrators (BOAs), or sales assistants, were raised after a survey by the firm showed that BOAs were underpaid in certain regions. Those increases were funded by individual Jones reps.

Merrill Lynch has made several compensation changes for '98. First, Merrill raised the production requirements to qualify for its recognition clubs between 8.6% and 33%, depending on the level. Second, the firm has altered its asset-gathering awards: Brokers with six or more years of service will only be compensated on accounts Merrill terms "near priority" (assets of $100,000 to $250,000) and "priority" (assets of $250,000 or more). Smaller accounts will still be counted toward the award for those brokers with five years or less at the firm.

The asset-gathering awards have been split into two calculations: baseline and growth. For the baseline, Merrill has sliced the awards by 50%. Assets under $100 million receive production credits of five basis points (down from 10 previously). Assets of more than $100 million get production credits of 1.5 basis points (down from 3). Payout remains at 25% on these bonus credits.

The growth figure compares the broker's client assets with the previous year's baseline. A broker with up to $10 million in asset growth receives production credits of 40 basis points on that amount. A broker with more than $10 million in growth receives a 25 basis point credit. Both credits are paid out at 25%.

Third, Merrill is now pocketing more of the fees charged on trust accounts. Reps used to get a gross credit on the entire fee, but now, for managed trusts with assets greater than $2 million, reps will get credited for 75% of the trustee fee. On trusts with assets of $1 million to $2 million, credits were trimmed to 65% of the trustee fee, and on trusts with assets less than $1 million, Merrill reps will be credited with just half the fee.

And in another change that could have a major effect on firm veterans who do a lot of trust business, payouts on inherited trust accounts will be cut by 50%.

One Merrill broker justifies the changes this way: "They're trying to get the best out of everybody. Complacency isn't something Merrill wants in their offices."

However, when asked about the pay changes, a second Merrill producer simply says, "Yuck. That's not a happy subject around here."

Dean Witter brokers also were miffed in August 1997 when, following the firm's merger with Morgan Stanley, they received a pay cut on new and secondary issues coming through Morgan Stanley's syndicate. Retail reps' sales credits on Morgan Stanley IPOs were pared by 35%, and secondaries were trimmed by 25%.

Some Dean Witter reps rationalized that IPOs hadn't been a significant portion of their pay until after the merger, and that a percentage of something is better than a piece of nothing. Morgan Stanley Dean Witter reps report that no other compensation cuts have been announced.

PaineWebber brokers are in for some compensation changes this year. The firm has raised its recognition club levels by 10%. To get into a club, brokers have to hit $475,000 in production instead of $440,000. And the firm has eliminated the stock option plan at all club levels (however, it's still available to top management).

In addition, asset-gathering awards have been dropped by 25%. For example, assets from $1 million to $100 million used to get production credits of 2 basis points, but will now get credits of 1.5 basis points.

A change in PartnersPlus, PaineWebber's deferred compensation plan, affects only top producers. The program is now capped at $100,000 per year total contribution. For brokers in the $1 million-plus gross category, since the firm is likely contributing $100,000 already, these top producers probably won't be able to make the voluntary 50% contribution, according to one such broker.

Some brokers are taking the changes in stride. Another PaineWebber rep says the firm's compensation is comparable to other wirehouses, and he doesn't complain about it because he can't control it. "We're in a business. Brokers are taking 40%; that's a pretty good profit."

At A.G. Edwards, the bonus payout of up to 5.5% now starts at $225,000 production instead of $180,000 and is retroactive to $130,000 (up from $110,000).

At Edwards, the payouts are based on ticket size, and there are ranges for each product category (see "Payouts for a $225,000 Producer," Page 74). But brokers say that very few of the trades are compensated on the low end of the range. "Anything above the nuisance level usually gets the maximum payout," notes one Edwards rep.

For fee-based accounts, brokers are paid up to 40% of the fee plus a bonus if the broker qualifies, according to an A.G. Edwards spokesperson.

Prudential Securities brokers are not facing pay changes, reps report. But for Prudential managers, it's a different story. As RR reported in July '97, Prudential introduced a management compensation package that links manager bonuses to defined objectives. Half of the bonus that used to depend on branch profitability growth now depends on hitting targets for mutual funds, Prudential variable annuities, Prudential's Command accounts, retirement assets, multiple products per account, Financial Architect financial plans, and completed new account profiles.

Whereas Prudential is tying managers' bonuses to products, Smith Barney is using management bonuses to promote work force diversity. Following the public relations nightmare of the sexual discrimination and harassment suit brought against Smith Barney, the firm created a diversity initiative that ties 10% of managers' bonuses to a subjective evaluation of their efforts to improve diversity at the firm.

While Smith Barney managers are diversifying the staff, brokers are plugging along with the compensation status quo, which is quite all right with them. The firm's stock ownership plan is "an incredible opportunity to build wealth," one broker said in RR's Brokerage Report Card Survey.

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