Is the old wirehouse model dead?

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Feb 24, 2009 2:51 am

A few months ago I was very close to making the jump to a wirehouse to start building my book, and then the bottom fell out with the market and all the mergers and acquistions of Morgan Stanley Citi Smith Barney Larry Moe Curly Shemp Curly Joe and other firms of such ilk.  I have decided to weather the current market and economic climate out on the sideline and maybe take another stab at it in a year or two, once the market and economy begin to rebound.

 
I was looking at taking a wirehouse job with the two year salary to buffer the transition to "eating what I kill", so to speak.  All the major wirehouses have frozen hiring of trainee advisors under their old training programs, and the indy firms seem to offer very little in the way of salary or buffer to help ease the transition.  My question is this: do you think the old model of the wirehouse training program (ala Smith Barney, Merrill Lynch, et al.) is dead and gone for good, do you think it will resurface after the dust settles with all the mergers and acquisitions, or do you think another model will surface in its place permanently, and why?
 
Thanks in advance for all your thoughts.
 
Regards
Feb 24, 2009 7:50 am

I think they ahve to wait and look at retention.  However, I think you will continue to see the same thing...lot's of attrition offset by lots of transfers coming in....basically a continuum of musical chairs.  That has always been the case.  Now each firm just has more advisors to do it with.  In the short term, the "big 4" (BAC, MSSB, WFA, UBS) have no need to have a trainee program, as they will each have far more advisors than they want or need (except maybe UBS).  So why maintain a trainee program?  Just added cost for the next 5 years.

 
I do think you will see some major changes in this down the road.  For example, maybe they only take on trainees that have been recruited to be on an existing team (so they know they will make it).  But I think the old model of training programs are dead for now.
 
P.s.
Did you ever think you would see the day when the "big 4 wirehouses", so-to-speak, are Bank of America, Morgan Stanley Smith Barney, Wells Fargo, and UBS?????
Feb 24, 2009 10:27 am

Ice is right- There are millions of accounts in play right now from clients who are dissatisfied and looking to make a change.


The worst time to start is when everythings hunky-dory, the markets are going higher and everyones happy with their broker and investments, and don't want to talk to anyone new.
 
Better you get the training now to prepare you for future down markets than to wait and be shell shocked when it happens again.
 
The money is out there. Are you going to go get it? Are you man enough?
 
(Can't remember the movie or the quote exactly, Glenn Gary Glenn Ross?)
 
Stok
Feb 24, 2009 11:10 am

i agree.  sounds like the typical client response of, "i want to wait for the market to turn around before doing any investing."

Feb 24, 2009 6:13 pm

If the wires do cut back on training new reps, consider your self lucky.


90 days of sales  training is a joke.
 
 
Feb 24, 2009 6:25 pm

No.

Feb 26, 2009 12:54 pm

I don't think the Wirehouse model is dead, but I think reps and advisors are re-evaluating their careers and opportunities with the wirehouse versus going independent. It is true that there is some security in having a salaried position with commissions attached, but if you calculate your gross commission ... are you really getting paid what you're worth. Wirehouses also have their own non-compete clauses which means that all the hard work you do to bring in new assets aren't yours but the wirehouse's.  During these times where the markets are historically low, there are a series of Mergers and Aquisitions, Brokers/ Advisors are being let go as well as other salaried employees, a lot of these reps are seriously looking at their careers and taking action.

A number of them are taking the independent route simply because they are building their own practice, own their own assets and manage their business on their own terms. On top of that, going Independent generally gives reps a much higher payout starting at double their current grid. Yes there is no salary from the independent practice, but if you think about it, if you gross $500,000 and your at the average 28% payout, you're earning $140,000 plus your $60,000 annual salary totalling $260,000 annually. However going independent with the same gross but at a 75% payout nets ou $375,000 annually representing an extra $115,000.

Feb 26, 2009 3:29 pm
WallStreet*E:

I don't think the Wirehouse model is dead, but I think reps and advisors are re-evaluating their careers and opportunities with the wirehouse versus going independent. It is true that there is some security in having a salaried position with commissions attached, but if you calculate your gross commission ... are you really getting paid what you're worth. Wirehouses also have their own non-compete clauses which means that all the hard work you do to bring in new assets aren't yours but the wirehouse's.  During these times where the markets are historically low, there are a series of Mergers and Aquisitions, Brokers/ Advisors are being let go as well as other salaried employees, a lot of these reps are seriously looking at their careers and taking action.

A number of them are taking the independent route simply because they are building their own practice, own their own assets and manage their business on their own terms. On top of that, going Independent generally gives reps a much higher payout starting at double their current grid. Yes there is no salary from the independent practice, but if you think about it, if you gross $500,000 and your at the average 28% payout, you're earning $140,000 plus your $60,000 annual salary totalling $260,000 annually. However going independent with the same gross but at a 75% payout nets ou $375,000 annually representing an extra $115,000.

Firstly...$140K plus $60K = $200K...not $260K. So, you're spread is actually $175K. Even more significant than you illustrated. Unless, of course, my math is wrong.  But I have a question...
 
I need to qualify this question due to my naivete(insert accent here) because I'm brand new and still training. I'm curious...your figures above seem to present a strong case for being independent...albeit from simply a financial standpoint...however, and please anyone correct me if I'm wrong here...28% seems a tad light for avg payout (according to what I've seen from old payout grids of the wires and EJ's payout). 35% - plus seems a little more in line with what I've seen so far (which doesn't mean I'm right). Also, wouldn't expenses need to be deducted from your $375K net figure? You are, after all, running your own small business subject to certain overhead costs. We're talking rent, insurance, utilities, possibly payroll for staff, supplies, etc. In addition, wouldn't you be subject to a much higher self-employed tax rate? Seems like that extra $175K could get whittled down pretty quickly.
 
I figure more than likely indy probably still nets out better, but it's probably a lot closer than $175K difference.
 
Again...I don't have the experience, so I'm not trying to argue the point...but it seems like there may be some additional, significant variables.
 
Any thoughts?
Feb 26, 2009 3:46 pm

At which firms are people grossing $500K and being paid a $60K salary also?

Feb 26, 2009 3:59 pm

Fud, keep in mind, not EVERY indy B/D pays out at 90%+.  And many of them you have minimum requirements to hit the high payouts.  My friend just went to Cambridge, and I think he is getting around 70%, less ticket charges (and of course less any office expenses).  But he also only had a T-12 of about 100K.


A lot people quote the RJ and LPL payouts on here, and those can be north of 90% if you are producing a certain amount.  I think LPL's bare minimum is 150K gross?  Which is not very much, but it means you can't be a brand-newbie.  You're probably looking at at least three years in the business, and around 20mm AUM minimum.  Correct me if I'm wrong.
Feb 26, 2009 4:38 pm

I'm pretty much clueless as to the full nature of an indy b/d payout structure. I'm also not interested in being indy...at least not right now...later on who knows. I was just saying that overhead costs and higher taxes seem to be inherent with being independent. I don't know all the ins and outs, but it seems that indys could potentially end up pocketing a slightly bigger chunk of gross but not the huge difference that was implied earlier.



Obviously, if one is operating an independent company, then there net income is dependent on not only their production but also their ability to control costs. It stands to reason that if someone is a high producer, then payouts are higher. Expenses would increase as well. At a 90%+ payout I imagine a savvy business owner could probably net out a very good result and pocket significantly more than a captive FA with similar production. On the other hand, at lower production levels and a ~70% payout, the financial benefit of being indy probably deteriorates significantly and may even disappear altogether. It obviously ends up being a risk/reward scenario that the individual would have to weigh.


Essentially what I'm saying is from where I sit, having no experience and virtually no knowledge, I can't see a $500K indy producer netting a full $175K more per year than a similarly producing captive, which is what was implied earlier. Probably a little more, but not THAT much.
 
Again, I'm just commenting on what seems to be common sense (lol...is there such a thing?), but I personally have no idea. What's the real deal???
Feb 26, 2009 4:42 pm

Seriously...if being an indy ends up netting someone 2 to 3 times more than being captive...the old wirehouse model will end up disappearing completely! Am I wrong???

Mar 3, 2009 10:45 am

These are all good questions. The research I have done for the major wirehouses at last year's rates were between 28% and 41%. If you read through the investment news websites and blog sites like repstreet, onwallstreet etc ... you will see a lot of articles where reps payouts are being cut as low as 22%. I know for a fact that Merril has reduced their minimum payout for reps earning below $250,000 and working there for I think 3 years have been cut to 22%. All of the wire houses are also reducing their support to these reps by taking away assistants, and reducing the level of support. So all of this for 22% currently (28% last) year doesnt make much sense for these reps. Recently, we had an inquiry from a Merril rep looking to leave because his payout was cut this way and it was no longer feasible for him to stay.

You are correct pertaining the costs of going independent where you will have to cover your own overheads. But lets take an example and analyze the expenses ... lets look at the Merril broker earning $500,000 with a 35% payout. The rep takes home $775,000 per year + a $60,000 salary totalling $235,000. The wirehouse however takes $265,000 to cover their expenses and John Thain's camodes :).  At this level broker, I'm sure he could run his own overhead costs for about $60,000 which leaves an extra $205,000 on the table. If the broker was independent earning a 90% payout at this level, he would take home $450,000 and after his annual overhead expenses of $100,000 would take home $350,000 representing an additional $115,000. Additionally, for those brokers and branches who are paid bonuses in stock ... it isnt worth much these days. I know brokers at Citigroup are looking to leave for this exact reason.