Retention Package Paranoia

If you are an advisor at Merrill Lynch or Wachovia, you’re wondering what your retention bonus is going to be.

If you are an advisor at Merrill Lynch and Wachovia, you’re wondering what your retention bonus is going to be. Will it be 100 percent of trailing 12-months production or something less? It all depends on your length of service and production, of course.

Yet, there is concern among some reps that firms won’t be in a position to offer a market-rate retention package—for fear of bad press. “They [executives] are sh*#&ing their pants about the headline risk,” says one 20-year veteran Merrill FA. He points to the recent flap over AIG’s taking life insurance reps on a $442,000 trip for meeting their sales goals—despite the firm’s brush with insolvency. (“AIG celebrates bailout with 400 thousand dollar bash”)

These days, all the big banks have stepped up to the Federal trough. Of the $700 billion financial rescue package, the federal government made $250 billion in capital available to U.S. financial institutions in the form of preferred stock. Of that $250 billion, the feds allocated a $125 billion capital infusion to nine banks as equity holding, with the largest allotments ($25 billion each) going to Bank of America/Merrill Lynch, Wells Fargo/Wachovia, Citigroup and JPMorgan Chase.

While this isn’t the first time the government has had to bail out the banking industry—remember the late 1980s and early 1990s—this time around, banks and their acquired b/ds have a skittish army of reps to pacify. Another caveat that hangs in the balance: With the RIA boom, more successful reps than ever—freed by plunging stock values in deferred comp plans—are considering fleeing (with their clients) to the RIA space.

“It is a major topic, and it’s got everybody concerned,” says Larry Papike, president and owner of independent recruiting firm Cross-Search. “The brokers are concerned because they thought they were going to get some big pop to stay, and now the b/ds are concerned, ‘What are we going to do to not get under the radar screen of the government?’ It is a major issue.”

Take Bank of America /Merrill Lynch. Since Merrill and BoA accepted a combined $25 billion capital infusion from the Federal government, rumors are swirling that Merrill might be restricted to the amount it can give to keep advisors from leaving. (When asked about these rumors, Merrill Lynch had “no comment.”)

Says Papike: “If these firms come out with retention packages, I think the general investing public will say, ‘I lost 20 or 30 percent of my investment portfolio, but my broker is making money. How is that fair?’”

But those concerns are probably overwrought. Merrill really has no choice. Without a retention package, the mood among the rank and file is: We’ll walk. “If [management] wants to protect its franchise, they’ll have to do it and take the [public’s] sh*#,” says one $100-million-plus Merrill advisor in New York. “We’re all getting lots of calls about going indie,” he says. “There are at least three teams with millions in production here in New York City that are leaving [to affiliate with RIAs]. Lifting out a team and going to an RIA that is offering some equity is starting to look pretty appealing.”

Merrill FCs say they hear that the top two-thirds of Merrill’s reps (about 10,500) will receive retention bonuses of 100 percent (or close to it) of their trailing 12-months production; 75 percent in cash, 25 percent stock in an eight-year contract. One source says it will be based on production from September 30, 2007 to September 30, 2008. The retention bonus will likely scale down based on length-of-service and production metrics. The bottom third won’t receive a bonus. Further, the Merrill comp plan will be tweaked to reward the most profitable FCs. Profitability is calculated as production less expenses and is different from gross production. “Now that we’re under a bank umbrella, it’s all about profitability,” he says. The top reps will see payouts rise to 60 percent, says the source, while the bottom third’s production will be reduced to 20 percent. The idea is to drive the smallest producers into teams with established FCs—or to drive them to other firms.

If the source is right, that makes for a hefty payout of capital—capital that critics might argue, erroneously, is “from the government.” Danny Sarch, a recruiter with Leitner Sarch Consultants in White Plains, N.Y., says Merrill is a productive sales force. Merrill will need to pony up at least something over its 16,000-strong Merrill army. “If they do $12 billion in production and they get 50 percent as an average bonus, that would cost $6 billion for the whole sales force.”

Still, these retention packages are make-or-break deals for some of the reps at these firms. While most reps think they deserve it, some Merrill reps—who have seen the value of their deferred compensation tied to underperforming Merrill stock tank—argue it’s only fair. One top-producing Merrill veteran says he and his fellow reps have been getting lucrative offers from other firms and if there were no retention bonus—or an inadequate one—the real value of Merrill (its reps) might disappear to, say, Morgan or UBS or even an RIA.

“I think 100 percent (trailing 12-months production) would be adequate … 50 percent not so much,” this Merrill advisor says. “To get a bonus just for staying put—it doesn’t make me richer. It helps me to restore the wealth that has been lost in the Merrill stock—the deferred compensation.” This Merrill rep says he has seen his deferred compensation take a million dollar hit—a fall by 80 percent in the last year or so. He says: “The Merrill stock—that hurts. That is a big part of your total picture and that with the buyout it does change the average FAs viewpoint of loyalty with the company—I’ve never really entertained a call from a headhunter in years, but I have in the last month for the first time.”

Wachovia Securities advisors are in similar straits. Wells Fargo received a $25 million capital infusion—$5 billion of which is for the purchase of Wachovia—but it has remained tight lipped on the retention bonus to be paid to Wachovia reps and legacy A.G. Edwards reps. “We haven’t heard a thing,” says one Wachovia rep, since Wells Fargo beat Citigroup’s bid for Wachovia Securities in early October. (Read more about the retention package offered to A.G. Edward reps last June here.)

Merrill reps believe the announcement is imminent. JPMorgan CEO Jamie Dimon announced a retention package to selected Bear FAs 15 days from the announcement of the purchase of Bear. Bear advisors with at least $500,000 in production received 75 percent of trailing 12-months production in cash, and another 25 percent in JPMorgan stock upfront. (Read more about the Bear Stearns FA plight here.)

Says a Merrill rep: “Retention packages are simply an established business practice. The economics in this business are clear. They don’t change overnight.” If Merrill were to offer anything less, “We’ll walk. And I think [management] has to offer this. They fear the RIAs.”

Still some advisors are more concerned about their clients than the any retention bonus. One legacy A.G. Edwards advisor (a 38-year veteran) says he’s seen his firm “change hands” three times in one week (Wachovia, then a bid from Citibank before the winning bid from Wells Fargo). That was stressful on him—and his clients. This rep says: “I am more concerned about having a safe place for my clients [some of whom have been clients for 38 years]. And I believe that has been taken care of.” Besides, he says, another regional firm isn’t a good place to hide, because they could be “glommed up” by another firm. The RIA route doesn’t appeal to him, since he thinks it would put clients through additional turmoil. And many clients are already worried about the valuation of their accounts.

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