Are small producers an endangered species? During the bull market, a broker with $250,000 in production was treated with a benign indifference, if not outright encouragement. Even as the bear market gripped the industry, firms were willing to keep these lower-producing reps on the payroll in hopes that they would be able to bring in new assets.
Now, with the bear market halfway through its third, withering year, firms are making their biggest cuts since the 1970s to get costs in line. And, increasingly, they're targeting the weakest players. They are raising minimum production levels and imposing payout cuts or other penalties on smaller accounts and transactions.
It isn't just novice brokers who feel the effects of management's drive for productivity. If you're building your business on smaller clients, beware — a number of large firms have moved smaller accounts to call centers (with Merrill Lynch being the most aggressive, shifting accounts with less than $100,000 to its call center) while cutting back on payouts and eliminating commissions for trades on accounts smaller than a particular size.
Until recently, brokers were immune to the industry's downsizing, which has included a decimation of the ranks of investment bankers and the elimination of thousands of support positions. Brokers, it was assumed, covered their own costs by generating commissions and fees.
But clients aren't trading, and new assets are hard to come by. At Merrill Lynch, for example, retail commissions were down 68 percent through the first three quarters of 2002 compared with the first nine months of 2001. “The retail investor is not going to come back soon,” Merrill's CFO, Tom Patrick, was quoted as saying on a recent analyst conference call.
So, low-end brokers are now squarely in the sights of corporate cost-cutters. “It's simple — it costs money to keep guys on payroll: the cost of insurance, et cetera,” says Rick Peterson, recruiter at Houston-based Rick Peterson & Associates. “But if these guys are doing anything at all in terms of growth, the firms are leaving them alone.”
Some firms have been particularly aggressive in their dealings with lower-producing brokers. Prudential Securities has been targeting producers with less than about $300,000 in trailing-12-month production. It has about 4,500 brokers, down from about 6,600 in March 2001.
Salomon Smith Barney has its own program to force low-end brokers to perk up or get out. It drops the payout ratio 1 percent for all those who fall short of $250,000 production.
Even A.G. Edwards, which has been known for putting less pressure on its sales force than other firms, is taking action against low-end brokers. In August, the St. Louis-based brokerage implemented a plan to reduce payouts 5 percent for five-year vets producing less than $162,500 on a trailing-12-month basis. “The goal is to get rid of underperformers, which I understand. But some producers are affected by this simply by the last three years we're in, so to institute it now seems heartless,” says one A.G. Edwards broker. “When that came out, I said, ‘I understand that.’ I was nowhere near it, but I'm slipping towards it.”
In a statement, A.G. Edwards stressed that brokers were notified of the policy far in advance of its implementation to give them time to adjust, and that it was designed to “encourage our FCs to improve and build their business.” But Edwards's brokers point out that market conditions have only gotten worse since then.
Other firms, including Deutsche Bank and CIBC Oppenheimer, also have been shedding reps at the bottom of the production scale. Still others have been putting reps on probation, telling them to increase production, or face the consequences. Merrill's cutoff is about $250,000, while other firms have levels in place that trigger cuts in payout or other penalties.
If there are any businesses reaping rewards these days, it's smaller independent firms and banks, which are more than happy to bring in $200,000 producers to help build up a business. “We're looking for people who have been trained properly at wirehouses and are tired of getting paid 35 percent,” says Rob Rabinowitz, chief administrative officer at independent broker/dealer Montauk Financial, a Red Bank, N.J., firm with about 500 reps. “They've got to run their own business and run their own offices, but if they manage and control expenses, net-net they'll bring more dollars home.”
Unfortunately, there is no relief in sight for low-productivity brokers. “Investors remain shell-shocked, and with good reason,” says Sanford C. Bernstein analyst Brad Hintz. That makes getting new business — the sure way for brokers to survive — much more difficult. Which means the choices aren't good for those who are struggling to break $250,000 — payout cuts or disorienting moves to another firm.