New to FA business and need advice

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Mar 6, 2008 9:28 pm

Hello all!

I’m new to the FA business and am hoping you, much more knowledgeable and experienced people, can help answer a few questions for me.

I came from the B2B environment where I sold and designed 401k and Defined Benefit plans.  I have my Series 6, 63, Life and Health and Property and Casualty licenses.  Currently, I’m also studying for the Series 7 exam - which will be followed by the Series 66 exam.  The Series 7 exam is coming up on March 14th.  Wish me luck…

Before my questions, a bit of background.  I left my previous employer because I was required to travel a lot.  I wanted to find a job that allowed me to be with my family more often.  I decided to accept a position at a local firm in my South Dakota city.  We’re a Registered Financial Advisor firm with approx. $250 million in assets under management.  We’re also primarily a fee-based firm but still have around $100 million in commission/transaction-based accounts.  However, all new accounts are only fee-based.  We have approx. 1700 active clients but around 500 of them have what our firm calls ‘small’ account values - under $100,000 total.

Additionally, the owner of our firm is the only ‘Rep’ registered from a commissions standpoint with our B/D.  The other Advisors (all 2 of us) earn commissions plus a base salary but they are paid out of the owner’s pocket rather than through the B/D. 

The owner has decided that we already have more than enough clients and he only wants to add new clients on a referral-only basis.  Our target client is at least 50 years old and our firm’s minimum ‘investable assets’ is $100,000…meaning if the client doesn’t have $100,000 to move to us, we don’t want them. 

We do a few ‘retirement’ seminars throughout the year and get prospects through those seminars as well.  Over the years, a fairly decent prospect list has been created and each of us get our own piece of the alphabet as our prospect list to call on.

With all of that said, I need your help in putting this into perspective as it relates to other firms…such as the A.G. Edwards and Edward Jones’s of the world.

Q:  What are the average commissions percentages at other firms? 
OUR FIRM:  As it stands today, I receive 40% of GDC (minus our B/D’s cut which I believe is around 15%) if I get one of my prospects through the doors, hold the 1st meeting with them and eventually get the business.  However, our owner is very controlling.  He keeps any clients (or potential clients) if they have over $300,000 in ‘investable assets’.  He also handles 90% of the 1st meetings I mentioned.  In those cases, if he handles the 1st meeting and eventually gets the business, assuming they’re assets are under $300k, he’ll ‘refer’ the new client to me if they’re from my prospect list.  In those cases, I get 20% of GDC (minus the B/D’s cut).  I also get a base salary of $40k.

Q:  If you work at other firms, do the FA’s typically ‘own’ their clients?  Meaning, if they choose to leave the firm, do the clients go with them?
OUR FIRM:  Since our owner is the only Advisor registered for commissions with our B/D, he maintains he ‘owns’ the clients.  Should I leave in the future, I take nothing with me.

Q:  Do other firms pay for license renewals (such as Life and Health) and continuing ed classes?  Also - what about fidelity bond coverage (or other insurance) premiums?
OUR FIRM:  Yes - for now but it could change in 2009.

I know this is a really long post but I’m so new to the business that I need some help understanding how things work at other firms.  There’s discussion in our firm of moving to 100% commissions next year and I want to better understand what I’m possibly getting into.  Since I’m still new (only a month into the job) I don’t have any existing clients assigned to me.  That will happen in about 3-4 months but I have no clue how many clients or what average asset level they’ll be in.

I’ve been discussing investments and mutual funds for about 10 years - just not as a Registered FA - only as part of 401k plans.  I feel very comfortable with that part of the business - I just don’t understand the commissions side very well since I’ve never worked under that arrangement before.

I’d sincerely appreciate any info anyone can share with me.  My apologies for the extremely long post.  I won’t make a habit of it. 

Thanks in advance for your help and advice!

Mar 6, 2008 10:35 pm

You need to clarify – if the gross commission is $10,000 and the B/D gets 15%.  Is the math $10k – 15% = $8.5k of which you get 40% or $3,400 (in this case your net payout is 34%)?  Or is it:  40% of $10,000 = $4,000 – the 15% = you get $2,500 (your net is 25%)?   

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Both of these are very generous if you receive in addition a permanent salary of $40,000 and pay none of the expenses of the office.  The industry norm would be you would get zero salary (after the completion of training – a few firms will provide some salary for as long as the first two years) and payout somewhere between 30-40% of the GDC.  In addition, you likely would have to pay for most of your marketing expenses.

As to who the clients belong to – it is my firm belief that the client chooses.  Most wirehouses consider the clients theirs not the advisors.  Legally, have you signed a non-compete and/or non-solicit contract?  That is the real answer, but you can always talk to an attorney about your options.  But if I am the client and my advisor switches firms, who is to tell me that I can’t move my account?  The question becomes can you contact them, can you take information regarding that client, and can you solicit them when you move?

As to licensing and continuing education, that can be all over the place.  Generally wirehouses will pay for some or all of the licensing and registrations, depending on your revenue (for example if I want to be registered in <?: prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Texas (which is over $200 yrly – if my gross commissions aren’t at least $1,000 annually from Texas, then they won’t pay it).  Some will pay for and provide the continuing education, some won’t help at all.

Mar 6, 2008 10:58 pm

Your firm is discussing moving to 100% commissions next year?

I haven't done any fee-based business yet--duh, I work for Jones--but I thought the fee-based platform had been officially confirmed as the best thing since the shirt pocket.   Aren't most firms moving the other direction? What gives?
Mar 6, 2008 11:23 pm

I took the 100% commission part to mean that the base salary might disappear and sko would only be paid based on revenue.

Mar 7, 2008 9:32 am

I'm confused.  If your firm is an RIA firm and all new accounts are going to be fee-based, your GDC is going to be zero.  The exception is if he is actually an IAR under his B/D's corporate RIA and they make all RIA business go through the grid.

Anyway, from your post, it sounds as if on most accounts, you are only getting 5% or 17%. It's tough to tell based upon your post.  Ex. GDC =$1000.  After dealer concession =$850 x .2 =$170 or GDC =$1000 x .2 = $200 -$150= $50.

Depending on how it gets calculated, assuming a 1% fee, you are going to have to open 58 $100,000 accounts or 200 $100,000 accounts to make $50,000 instead of $40,000.    In short, you need to look at this as a $40,000 salary position with the possible opportunity to make a little bit more.  Unless the arrangement changes, this job can be used as a one year learning experience and nothing more.
Mar 7, 2008 9:42 am

I think his "commission" is not what most of us consider to be commissions (GDC).  His commission is really a "bonus" paid from the owner (since he stated it comes from the owner, not the B/D).  So he gets "commissions" from both "commissioned" products (that the owner earns through the B/D), as well as well as advisory fee business (the RIA piece).  So it sounds like his salary is going away, and we will just be earning straight "commission" as he calls it.

Of course, I could be wrong....   SKO, try to give us a real-life example with numbers. Otherwise, it's tough to understand the flow of how your income works currently.
Mar 7, 2008 11:51 am

SKO, you are in what at a wire house would be traditional hunter-skinner partnership. That is; one partner, usually a junior partner, hunts for fresh prospects, and then brings them to the senior partner who skins them. That is, of course, closes them and makes them a client.

  Within a wire house program you could expect two to three years of salary plus ALL your expences paid. The salary you receive will entirely based on your previous income history. I've seen wires go as high as 80K, and heard they've gone much higher. Yet, the 30 to 50K range is more the norm. The salary will remain in place at 100% for the first year and probably 100% for the second. Year three the firm will wean you off the salary. By the end of year three you'll be entirely dependant on the fees and commissions you generate. If that scares you, look elsewhere for a career. I say that only because that's the key to this business. You  and you alone control your financial destiny. Clock punching non risk takers need not apply.   The commission range will be 25 to 45% with incentives that could add another two or three percent. There is no B/D haircut at the wires, though UBS imposes a ticket charge.  The commissions are tied to a production grid. Payouts are determined on a gross production versus length of service matrix. As a rookie you could expect a higher payout than someone with 5 years LOS at the same production level.   As for what is the best career path for you to take? Only you can answer that question. If you want to be your own person and be totally in charge of your destiny, go to a wirehouse and sign yourself up. You will never have your own business in your current situation. However, there is the flip side. Being a well paid second fiddle isn't a bad gig as long as you can stomach the boss, his kids, wife, and girlfriends. Understand that, long term, your current situation offers you less security than would building your own practice. If the boss decides to fold his tent and sell the practice, you might not be part of the new realilty.   Noone here knows you well enough to give advice on which path you should take. But know this, eveyone on this board is doing as your boss is doing, building it for themselves.   Good luck!
Mar 7, 2008 8:27 pm

Thanks to everyone who has responded thus far.  I really appreciate the help!

It seems as though there’s a bit of confusion surrounding my ‘commissions’.  In the truest sense of the word, I don’t get paid commissions since they come from the owner and not the B/D.  I’ll try to explain it a bit more.

All commissions from the B/D get paid to the owner of our firm.  We (the other 2 advisors) get paid only from the owner of our local firm.  Here’s an example of how I make ‘commissions’:

ASSUMPTIONS: a new client bringing $200,000 to our firm - the firm’s annual ‘advisory fee’ is 1.25%.  The fee is actually taken quarterly (25% of 1.25% each quarter) but I’ll keep it simple and just use the annual fee.

Example:  As I stated in my original post, when I get a commitment from a prospect to meet with our firm, as of today, the owner of the firm handles all of the 1st meetings with the prospect.  The first meeting is only to gather info - current assets and investments, last tax return, estate plans (if any), outstanding debts and any other pertinent info.  From there, the prospect will come back for a 2nd meeting where we’ll detail for them the holes in their total financial plan and how our firm can help - specifically with their investments.  After the 2nd meeting, should the client hire our firm, the owner will then ‘refer’ the new client to one of the other 2 reps - IF the new client’s assets is under HIS minimum.  Of course, our example is under his minimum so we’ll assume he’s referring the new client to me.  Now - here’s how I actually get paid my ‘commissions’:
1.  Take the new client’s $200,000 x 1.25% (our firm’s annual fee) = $2,500
2.  Take 15% (B/D’s portion) off of $2,500 and you have $2,125 remaining.
3.  As mentioned in my original post, since the owner ‘referred’ the new client to me, I only get 20% of the remaining amount ($2,125).  So, my ‘commission’ would be $425.

There are times when our firm’s owner will decide to allow us to handle the 1st and 2nd meetings with our prospects.  In those cases, should the prospect hire our firm, I would then get 40% ‘commission’ instead of the 20% ‘referral’ percentage.  So - using the same example mentioned above, my ‘commission’ would be $850 if I handled the 1st and 2nd meetings.

Some other important details - we only get paid that ‘commission’ ONCE.  Meaning, after the $425 or $850 payment, that’s it.  We will meet with our clients semi-annually to review their portfolio with them.  Depending on the amount of total assets with our firm, we may even meet with them quarterly.  If we were to talk the client into transferring additional dollars to our firm, we would make NOTHING in ‘commissions’.  Putting it another way, we don’t get paid any ‘commissions’ for bringing in new money from existing clients. 

Also, there’s no guarantee that the prospects on my prospect list will be referred to me by the owner should he gain their commitment to working with our firm.  So - I could work my rear-end off to get them in for a meeting but get nothing in return.  However, if the owner refers that prospect to the other Advisor after the prospect agrees to hire our firm, that Advisor gets the 20% ‘commission’ for doing nothing.  Of course, it also works the other way, too.  The possibility exists that I could get a client referred to me that was on the other Advisor’s list as well.  There doesn’t really seem to be any consistency in deciding who gets which clients/referrals.

Finally, to clear up a few more items, our firm is likely moving to 100% ‘commissions’ next year - meaning - no more base salary.  I keep using quotation marks on ‘commissions’ because, again, they’re not commissions in the truest sense of the word.  We get paid directly from the owner - not the B/D.  The owner is the only one registered with the B/D with respect to commissions.  Of course, I’m also registered with the B/D as an Advisor - but my commissions agreement with them reflects amounts of 0%.

If we do move to 100% ‘commissions’, I’m betting our new ‘commission’ amount will be around 35%.  However, there’s A LOT I don’t know about how and/or what we’ll be paid on.  My hope is that we’ll get paid when the firm gets paid.  In other words, I’m positive there will be many clients assigned to me as their personal Advisor.  If that’s the case, I’m hoping I will make 35% of each quarter’s ‘advisory fee’ (minus 15% for the B/D) for EVERY client assigned to me.  Under that assumption, we would then also be paid for new money transferred to our firm from existing clients - unlike the current structure.  Putting it another way, if the client’s portfolio grows (new money or higher return), we’ll make more money because the ‘advisory fee’ would be higher.  The ‘advisory fee’ is taken from the client’s investments quarterly and it’s based on the portfolio value as of the billing date each quarter.

Some of you are also correct in your assumptions regarding office staff, supplies, etc.  I don’t have to pay for anything with regard to those costs.  The firm has 7 support staffers who represent positions from receptionist to client services and one person who primarily handles the daily trades.  I don’t have to pay for marketing (after all, I don’t own the business) nor do I have to pay for office supplies, etc.

Hopefully, that helps you to better understand our firm’s structure.  Since I’m new to the business, I’m just not certain how ‘different’ our structure is compared to other firms.  How ‘good’, ‘bad’ or ‘not-so-bad-but-not-great’ do I have it?  Is this firm structured in a way that will afford me the opportunity to make a decent amount of money or is it just a pitstop on the way to bigger and better things? 

I know that’s a question which can ultimately only be answered by myself but I’d still like to hear your, obviously more educated, opinions.

Thanks again for all the responses.  I’m looking forward to hearing more from you soon!

Best of luck to all of you!

Mar 7, 2008 10:47 pm

Let me repeat myself. 

"In short, you need to look at this as a $40,000 salary position with the possible opportunity to make a little bit more.  Unless the arrangement changes, this job can be used as a one year learning experience and nothing more."
Mar 7, 2008 10:59 pm

It sounds really shady to me.

Mar 8, 2008 12:57 pm

Anonymous -

I understand what you’re saying about this being a one year job (pit stop) to learn the business and gain experience. 

In reality, I’m hoping it could turn into something more but I’m not holding my breath.  That’s why I’m looking for advice from all of you.

Should this truly end up being a pit stop position, I want to make sure I understand what else is out there from the standpoint of average commission amounts, expectations, etc.  If I end  up leaving my current position, I’ll be leaving without an established client list (since I can’t take them with me).  From what I’m reading in other posts on this board, many people are saying that’s a big negative…and that concerns me.

Thanks for your input!  Honest opinions are exactly what I’m looking for…even if they’re not especially positive as it relates to my current position.

FYI - I’m not intending to say your comments are negative…just honest.

Thanks again.

Mar 8, 2008 5:03 pm

It sounds like a decent 1 year pit stop learning experience since he is very successful. 

Mar 8, 2008 5:12 pm

In my opinion being able to learn the business at a company that’s smaller, and potentially less busy would be better. If you start out working at a wirehouse that particular branch could be so busy you’d just get caught up in the shuffle. Something to think about.

I’d work there for a year and learn as much as you can.