Even in a bear market, brokerage firms try to hire good producers. Mostly, firms are still downsizing their broker ranks, via attrition or outright dismissals. But one firm is aggressively hiring reps: UBS PaineWebber.
In the last quarter of 2002, for example, PaineWebber added a net 270 financial advisors (a 3 percent increase in FAs), while Merrill Lynch, Smith Barney, Wachovia, A.G. Edwards and Morgan Stanley had a combined reduction of 1,173 financial advisors.
Recruiters say PaineWebber isn't looking for anything particularly different in terms of the kind of producer: a lot of fee-based revenues, high production, clean CRD. They can be established reps or rising stars.
PaineWebber has done so well, in fact, there have been rumors of possible “raiding” lawsuits (although none had been filed at press time). On the recruiting front, says one rival branch manager, “They're cleaning our clocks.”
Recruiters attribute PaineWebber's success, in part, to an innovative employment package featuring a combination of up front money and deferred bonuses rooted in how the new brokers perform over the next two years. The packages have been copied, in whole or in part, by Prudential, RBC Dain Rauscher and a few other firms.
To some, PaineWebber's contrarian strategy seems questionable. Obviously, brokerages are cutting reps for a reason: The retail investor has gone on strike (witness the $27 billion outflow from stock mutual funds in 2002 — the first full year that's happened since 1988).
But executives at competing firms understand PaineWebber's strategy. The most successful firms on the Street in terms of profit margins — Merrill Lynch and Smith Barney — also have the largest sales forces. There is believed to be a strong cause-and-effect link between the two numbers. Merrill has 14,000 brokers and a pre-tax profit margin of 14 percent for 2002. Smith Barney deploys somewhere between 12,000 and 13,000 brokers and had a 19 percent pre-tax margin for 2002.
UBS PaineWebber, meanwhile, showed a pre-tax operating profit of 5 percent in the fourth quarter last year, but a 4.2 percent pre-tax loss for the entire year (partially due to currency translations). Excluding acquisition costs and the costs of the research settlement, margins were higher by about 10 percent, as improvements were shown in latter quarters of the year with the larger sales force and reduced expenses.
“If you look at their margins, they've got to get bigger,” says one executive at another firm. “They're betting on the notion that [the market is] hitting the trough and going to come back up.”
The play for size has been tried before, most notably at Morgan Stanley and Prudential. Those experiences should serve as a warning to PaineWebber that timing is very important.
Morgan Stanley tried to power up its sales force to reach the size of Merrill Lynch — right at the peak of the market. After the fall, it found that the larger work-force was a burden rather than a blessing. As of Feb. 28, 2002, Morgan had 14,115 advisors. One year later, it had around 12,000 brokers. (See related story, page 24.)
Prudential's experience was arguably worse. The firm also was at its most voracious near the top of the market, paying large up-front bonuses. In the wake of the crash, however, the firm resisted large-scale layoffs, in part to prevent a loss of client assets. The money-losing group was eventually sold to Wachovia Securities.
Though some think the market has hit or is near a trough, observers say PaineWebber's margin for error is still small.
“Here's the problem with the number of people they're hiring, with a huge percentage on the heightened payouts: If 30 to 40 percent of the force has these contracts, eventually you're going to be forced to cut the base payout,” says one attorney, who requested anonymity.
On the other hand, a recruiter noted that PaineWebber hasn't “gotten into the cost-cutting that Merrill Lynch had to.” In 2000, Merrill had 20,000 brokers, and it has cut back sharply as the bear market has worn on.
Not all believe PaineWebber's push is dangerous.
“You can spread a lot of expenses over a lot of people,” says Dallas-based recruiter Paul Richardson. Some costs, he says, such as office space and telecommunications, don't vary much if a few additional reps are added per office. “I think they're being smart — they're not opening offices frenetically like these other firms were.”
In addition, the firm isn't paying the bonuses offered by other firms during the death throes of the bull market that have become major liabilities. PaineWebber's highly regarded recruiting deal starts with a 70 percent upfront bonus based on the rep's trailing 12-month production, followed by potential bonuses of 15 percent in the each of the next two years, based on the rep's production. PaineWebber wouldn't comment on the details, only saying they “continue to hire financial advisors with good business plans and strong client relationships.”
“For the right people they'll pay 100 percent. Keep in mind, they're still No. 4 in terms of size, and maybe even No. 5.”
Tale of the Tape
|3rd Q 2002||4th Q 2002||Change|
|Source: Company Reports|