Change is a fact of life, and humans are built with varying degrees of adaptability and resilience. That is, there are those who see change for what it is and rise to new challenges, and others who turn their heads in hopes that things will “settle down.”
Yet, in the wirehouse world, there is no sign that things will settle down.
The fact is that much has changed—and continues to do so—in four key areas:
- The Broker Protocol: Morgan Stanley and UBS left the Protocol two years ago, and rumors are swirling that Merrill Lynch is likely to follow suit, creating more risk and changing the process for advisors moving to other firms or models.
- Recruiting: Wirehouses are recruiting more selectively and far less than ever before; firms like Merrill are focusing their recruiting efforts on low length-of-service advisors who will be paid a salary, thus creating a new generation of financial advisors who are not paid on a commission basis.
- Retirement Programs: Retire-in-place programs—like Merrill’s recently announced enhanced client transition program (CTP)—are being shored up, designed to incent more advisors to sign on earlier in their careers—essentially binding them and their teams for the next decade or more to the firms.
- Compensation: Changes to compensation structures, increasing payout grid thresholds and diminishing bonuses seem to be part of the new norm, along with “carrot-and-stick” approaches designed to encourage advisors to add households or sell bank products.
Even if you have no foreseeable plans to move, these changes do impact your business.
As advisors become bound to their firms by more restrictive retention programs, the balance of power continues its shift from advisor to firm, limiting the creativity and control advisors have over how they manage their businesses.
Currently, most advisors’ employment agreements indicate that the firm owns its clients. Practically speaking, advisors are really “at will” free agents with the power to determine how best and where to serve them.
The greatest concern on the part of most every successful advisor is losing the entrepreneurial spirit that has forever defined their business lives. Will they be turned into salaried private bankers who serve at the discretion of management without ownership and control over their businesses?
As firms encourage more cross-selling to maximize compensation, cut budgets for support staff and bind an increasing number of advisors via sunset programs, the pendulum of control swings further away from advisors and toward the firms they work for.
With the progression of this transfer of power, the net effect on wirehouse advisors could include the following:
- Cash compensation is cut and deferred further. The firms could eliminate team grids where junior advisors would lose the benefit of their senior partners’ higher production levels.
- More draconian post-employment restrictions such as noncompetes and garden leave, the most restrictive covenant that prohibits an advisor from contacting clients for 30–90 days after resignation.
- Next gen inheritors of retiring senior partners who sign on to retire-in-place programs could lose optionality, making them more expensive to recruit and diminishing the value of their businesses.
Essentially, what we’re seeing is the paving of a glide path for changing advisor compensation to salary-bonus for all. And it marks the evolution of the wirehouse world—transforming it to one that’s far different from what it once was and what it is now.
The good news is that there are now plenty of options. For example:
- Regional firms are valid alternatives for advisors who want to work for a firm that is smaller and less bureaucratic than the wirehouses. At these firms, compensation generally doesn’t change a lot, and advisors are viewed as clients.
- Boutique firms—like Rockefeller Capital Management and First Republic Wealth Management—are exciting middle-ground options for those who are intrigued by independence but want wirehouselike support and transition economics.
- For those who desire to be business owners and have maximum control, the independent broker/dealer and registered investment advisor channels have gained mainstream validation as options for advisors of all sizes—especially those managing assets in excess of $300 million.
While many options exist elsewhere, staying put is also a very valid choice, but do so with your eyes open. Be fully aware of the changes going on around you and how these changes may impact your business life—now and in the future.
Mindy Diamond is president and CEO of Diamond Consultants in Morristown, N.J., a nationally recognized boutique search and consulting firm in the financial services industry.