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Wachovia's decision to let employee reps transfer to its independent channel will help it retain top producers, but will it squeeze margins? Other firms will be watching

Wachovia Securities is loosening house rules to keep its reps from leaving home. In July, the firm began giving select employee brokers the option of hopping the fence for its independent-contractor brokerage platform, Wachovia Securities Financial Network, or FiNet. Previously, employee reps were forbidden from making the switch. But with competition for big producers heating up and more advisors looking to hang out their own shingle, Wachovia decided to let some employee brokers affiliate as independent-contractor reps rather than lose them to other independent firms.

Wachovia says the move will accelerate its growth. “By giving advisors choice, we'll be better positioned to attract and retain the best,” says John Peluso, CEO and president of FiNet. “It was the natural maturation of our business model. We'll be able to differentiate ourselves in the long term.” FiNet is the fastest-growing business unit at Wachovia.

Not all reps have the luxury of making the move. Only Wachovia reps who have generated $250,000 in revenue in the trailing 12 months and have five years on the job at Wachovia will qualify for a transfer to the independent platform, Peluso says. Tony Mattera, a firm spokesman, wouldn't quantify it but says, “A significant percentage of FAs in the firm would be eligible” to make the switch. For those who do qualify, there's the allure of a fatter payout. Wachovia employee reps with five years on the job receive 20 percent of their first $114,000 in production and 50 percent of any additional production. On the independent side, where there is a la carte pricing, reps can earn 85 percent to 90 percent of production — of course, that's before overhead and other expenses, which, as an independent contractor, they'd be responsible for.

“From when I came over in July 2003 through the end of 2005, my production was up 72 percent, and that's [with] me having to be the branch manager,” says one FiNet rep in the West. At FiNet and most other independent shops, take-home pay depends on the broker, because newer indie reps incur higher expenses. But, generally speaking, what an advisor keeps, after expenses, ranges from 45 percent to 65 percent, reps say.

The move is not expected to prompt a mass exodus from Wachovia's employee branch network, but it should help the firm hold onto those employee reps who want to run their own businesses. It could also help Wachovia recruit rookies who want full support at the start, but like having the option of independence down the line without the hassle of switching firms.

Blueprint for the Future?

Wachovia's not the first firm to offer multiple affiliation options to its reps — Raymond James has offered something similar for several years — but it is the first wirehouse-type brokerage house to do so (Wachovia bought Prudential Securities in 2003). Ultimately, the model could serve as a blueprint for the retail advisory business five years down the line, say some industry consultants. “It's a very smart strategy,” says Chip Roame, managing principal of research firm Tiburon Strategic Advisors. “It's setting the stage for an open platform.”

The independent channel is both the largest and the fastest-growing advisor channel. Independent advisors represent 35 percent of the industry today, up from 28 percent in 2004, according to Cerulli Associates. “There's a major movement toward independent-contractor status,” says Lon Dolber, president of American Portfolios Financial Services, an independent broker/dealer in Holbrook, N.Y. “People want to run their own business. Why fight it?”

But full-service firms have reason to be wary: Margins are far slimmer on the independent side, ranging from 2 percent to 8 percent, versus 15 percent to 20 percent at full-service firms. Critics say that while the policy may attract more advisors to the independent platform, Wachovia, and any potential emulators, risk diminished production in their employee branch networks. “Five years from now there will be many more advisors in the independent channel,” says Andre Cappon, president of the CBM Group, a consulting firm specializing in financial services. “But margins will go down and firms won't have the money to train brokers.”

In fact, Ameriprise had an open-door policy between its employee platform and its independent platform Securities America years ago, but it shut that down in November 2004. At the time, Ameriprise said it needed to rein in expenses, retain assets and simplify compliance. It didn't help that Ameriprise advisors were still being pressured to sell poorly performing proprietary products. Ultimately, Wachovia's model is an experiment that other full-service firms may want to watch.

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