Wirehouse squeeze

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Jan 7, 2009 2:44 pm


Smith Barney and Merrill Put Squeeze on Smaller Producers


By
Howard J. Stock

January
7, 2009

Two major bank-owned
wirehouses, Merrill Lynch and Smith Barney, are tweaking their grids in an
attempt to weed out weaker producers, confirms Howard Diamond, managing
director of recruiting firm Diamond Associates in Chester, N.J.



It's a matter of cutting costs, he explains. "It's all economies of scale.
It costs less to support one $1 million producer than it does to support three
$350,000 producers" in terms of marketing, sales assistants and general
overheads.



The tweaks raise the bar under which advisors find themselves in the
"penalty box." Merrill Lynch will now pay a flat 25% for advisors
with more than six years of service who are producing less than $300,000.
Formerly, the 25% minimum applied to 10-year veterans producing $200,000 or
less. Now, six-year vets doing less than $200,000 will earn commissions of just
20%.



Smith Barney's plan would drop nine-year-plus advisors' payout to 30% from 37%
on anything between $300,000 and $350,000, and lower the payout to 20% from 25%
to 27% on anything less than $299,999. It is also instituting account minimums
of $75,000 for transactional business and $25,000 for advisory accounts.
Advisors who don't hit those minimums won't be paid for the accounts.



Most advisors, especially those in metropolitan areas, can't live on payouts at
this level, Diamond says. To compound their misery, advisors in the penalty box
can expect a general lack of support, no travel and expense allowance to
entertain clients) nor access to sales assistance.



Having already suffered through the uncertainty of mergers and write-downs,
changes to the grids are proving the final straw for many advisors whose
production levels weren't high enough to land them on their firms' love lists,
Diamond says.



As such, many smaller producers are quitting Wall Street's humbled giants and
are either considering going independent or heading to banks and regional
firms, where a few hundred thousand can be meaningful production. Diamond adds
that banks are particularly attractive to rising stars who are good at what
they do, but lack the referral networks it takes to build a thriving business,
since these referral networks are built into the bank structure.



These wirehouses "are clearly sending a message that they're focusing on
higher producers and they don't want those below $400,000." The changes
will affect reps at Citibank, but it's still unclear if they will affect Bank
of America, whose spokesperson didn't return calls for comment at press time.

Jan 7, 2009 6:08 pm

I have a few guys in my office who are going to fall into the penalty box.  If the one guy had spent as much time working before this happened as he has now spent trying to figure out a way to work around the penalty box this would never have happened.

Jan 7, 2009 7:21 pm

The article begs the question:

How long will it take for the regionals to get swallowed up by the banks???
Jan 8, 2009 9:41 am

Hey, with the market down 40% $300,000 is the new $500,000.

 
It just lights a fire under peoples a## to work harder - I remember Morgan just fired everyone under 300K in one or two days a few years back.  These people will migrate to other firms and take another deal when the market recovers.
Jan 8, 2009 10:07 am

[quote=Sell High]Hey, with the market down 40% $300,000 is the new $500,000.

 Funny- I swear I've heard those exact words about 50 times in the last few weeks in and around my office!

Just using my best guess, my office has at least 25% of it's brokers in the "penalty box", this up from maybe 5-7% in October. And, after a couple got invited to leave in Dec. Did they stop working? Not at all, in fact, I've never seen more people in the office till it's dark outside in years!
Jan 8, 2009 9:16 pm
burtonfinancial1:

[quote=Sell High]Hey, with the market down 40% $300,000 is the new $500,000.

 Funny- I swear I've heard those exact words about 50 times in the last few weeks in and around my office!

Just using my best guess, my office has at least 25% of it's brokers in the "penalty box", this up from maybe 5-7% in October. And, after a couple got invited to leave in Dec. Did they stop working? Not at all, in fact, I've never seen more people in the office till it's dark outside in years!
 
Management can take that smug attitude now, people don't forget and they will be gone while acting just as smugly when the market improves.  I know there are plenty of pissed off million dollar producers.  I wonder what happens to wires when they consolidate all the relationships into a few huge producers and those producers decide to leave?        
Jan 8, 2009 9:48 pm
Broker Fee:

The article begs the question:

How long will it take for the regionals to get swallowed up by the banks???


LMAO...with what money

Jan 9, 2009 9:57 am

Regionals are going to continue to flourish in the next couple of years. If the current trends continue, banks won't be able to AFFORD to buy a regional. What's interesting is that the talent building Stifel, expanding Ray Jay and others is virtually all coming from the big 5. 

Jan 9, 2009 11:47 pm
burtonfinancial1:

Regionals are going to continue to flourish in the next couple of years. If the current trends continue, banks won't be able to AFFORD to buy a regional. What's interesting is that the talent building Stifel, expanding Ray Jay and others is virtually all coming from the big 5. 


You nailed it Burton!

Jan 14, 2009 3:32 pm

 I friend of mine at SB has thousands of accounts and he has been with the firm for 25 plus years.  THe problem is he gets a lot of gross from small tranactional accounts that he is now being cut off from.  Just like that... no warning.  This also applies keep in mind to persons who converted small account to C shares.  They wont get paid on those any long either.  Now that I am indy, I would not go back to SB if someone offered me millions free to do so.    

Jan 14, 2009 3:40 pm

The assets that Schwab and Fidelity are drawing are absolutely staggering in comparision to the big wirehouses.  Schwab alone gathered more assets in 2007 than the big 5 COMBINED.



The squeeze at firms like MS/SB/UBS and MER are not a surprise.  The break even point for these firms is got to be at or above 300.   The problem is that these firms refuse to cut the fat out of middle management.   I mean seriously, how many layers of management between the branch manager and the head of wealth management?  You have 4, 5 and 6 layers all grossly over paid people who frankly do absolutely nothing to drive business and profitability.
 
Clients want unbiased, objective advice.  Brokers at the middle and upper end are getting tired of being forced to drive profits via pay cuts.  These independent channels are going to put the traditional wirehouses out of business if the managemnt of these firms do not wake up.
Jan 14, 2009 7:08 pm

The <$500k FA at Smith Barney and Morgan Stanley is not going to be retained. I've heard from multiple sources that retention will be handled within weeks and the game plan will be set into motion with few delays. The new firm will whittle down to 15k-18k advisors and continue to recruit top advisors. Solid <$500k guys have plenty of options now at the regionals and indys. I stress now because there will be a herd in the coming months and the flow could change the game quickly.

We're already seeing the squeeze play out at ML. The lower quintile FAs at ML with any desire to stay in the biz are already looking at their options.  Those who are not are simply ignorant in my opinion.  Flame me if you want but it's the reality.

Watch the Wells/Wachovia drama continue to drag out for weeks still.  In the end, Wells does not want $300k producers either and the retention, IF one even happens will reflect that as well.

Jan 14, 2009 11:35 pm

I live in a non New York/LA zip code and work for a wire. This floors me. These companies throw away people who generate 300k in revenue for them. They only want $1 million accounts and $1 million producers. A guy who does 300k pays taxes on $100k of income. This puts him in the top 10% of wage earners in the country...that's not freaking good enough...A guy who does 250k in production pays taxes on $75k...this is a good living in most parts of the country...what is wrong? Where is the outrage? Is too much greed a good thing?

Jan 14, 2009 11:43 pm
onthemove:

A guy who does 250k in production pays taxes on $75k...this is a good living in most parts of the country...what is wrong? Where is the outrage? Is too much greed a good thing?

 
Greed is good.  Lunch is for wimps.
Jan 15, 2009 8:18 am
onthemove:

I live in a non New York/LA zip code and work for a wire. This floors me. These companies throw away people who generate 300k in revenue for them. They only want $1 million accounts and $1 million producers. A guy who does 300k pays taxes on $100k of income. This puts him in the top 10% of wage earners in the country...that's not freaking good enough...A guy who does 250k in production pays taxes on $75k...this is a good living in most parts of the country...what is wrong? Where is the outrage? Is too much greed a good thing?

 
Just to play devil's advocate....as a business owner/manager (i.e. the wirehouses), would you rather have 30 brokers in an office doing 300K each, or 10 brokers doing $1m each?  Which situation do you think requires more overhead, more layers of management, more benefits, more office space, more home office support staff, more branch office support staff, more insurance, more licensing, more training, etc.
Which group of brokers probably pulls in more high-end referrals?  Which group probably has more high-end clients with complex CASH management needs?
 
There's a lot of things to consider when looking at your "thundering herd".  Sometimes bigger is not always better (my wife reminds me of that ). 
Jan 15, 2009 8:55 am

Some bean counter forgot that if you keep squeezing the producers, they will eventually hit the bricks.  Mother Merrill and others brainwashed employees into believing they would fail in life without a name behind them.  Lately, that name on the door forces reps to spend more time defending their company than helping people manage their assets.  The independent firms have more products, more flexibility with individual marketing, and they keep you at the same payout percentages even if the market tumbles 35%.  There is a reason so many reps are leaving wirehouse, yet you almost never hear of anyone returning to the trenches once they go independent.  It works and producers are much happier with their life!!!

Jan 15, 2009 9:25 am

All the 1 million dollar producers I know got there buy hard work, good timing and inherited accounts.  Without the 150k, 200k, 300k or so guys that hustle to bring in new accounts there won't be any more inherited accounts to dish out to the top guys. When a broker gets canned, I have actually seen fights break out among top guys to get there hands on their accounts.  In general, without the bottom half there is no 1 million dollar producer top half.<?: prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Jan 15, 2009 10:32 am

Wolfgang, interesting take on it.  Makes sense.  I would also suggest that this is one of the other reasons wires are pushing teams.  You get lower producers to bring in new accounts, and ultimately leave (and the assets stay) or keep producing, and then take over the retiring $1mm producers book (and stay at the firm).  The process then repeats itself.

Whether this ultimately works in reality is another question.  I think if the firms were all still privately held partnerships without all the market "noise", this could be a well-orchistrated process.  But with all that goes on now, it's just a game of musical chairs, upfront bonuses, mergers, acquisitions, retention packages, etc.
Jan 15, 2009 11:18 am
burtonfinancial1:

The <$500k FA at Smith Barney and Morgan Stanley is not going to be retained. I've heard from multiple sources that retention will be handled within weeks and the game plan will be set into motion with few delays. The new firm will whittle down to 15k-18k advisors and continue to recruit top advisors. Solid <$500k guys have plenty of options now at the regionals and indys. I stress now because there will be a herd in the coming months and the flow could change the game quickly.

 
You know this because....? I work at SB and I have spoke with a number of Mgrs, and this was not the message I heard.  The firm has definately drawn a line in the sand but it is not what you are quoting.  Depending on your LOS I would say if you are not at $400k by 10 years it is not going to be very lucrative for you.  Above that it looks pretty good.
Jan 15, 2009 2:53 pm

It wasn't that many years ago that industry insiders and magazines like Registered Rep were predicting an end to the independents and everyone would work for super majors.  In a few years they'll be predicting an end to the super majors.  Sorry but with all the continued bad publicity the super majors have brought upon themselves, what is the allure of working for them?