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Apr 24, 2009 10:39 am

I’m curious if anyone has a number that an advisor in a wirehouse would need to do in GDC for the firm to breakeven.  Is it true that an advisor doing 300m in GDC is losing the company money.  If not, why would they be letting them go?  I’m obviously not looking at this correctly. 

Apr 24, 2009 11:41 am

I’ve wondered about that too. Jones considers an office doing $216m in annual production to be profitable, and they have an extremely expensive business model.

  I have a hard time believing that a wirehouse branch with several brokers couldn't be profitable much easier and with even less than $216m per broker per year in production.
Apr 24, 2009 12:01 pm

Look at the firm minimums for +5 los, this is a good starting point.  AGE brokers were profitable @ $160m I have been told.

Apr 24, 2009 12:08 pm

It’s all averages.  But here’s the deal at the wirehouses…I don’t think eliminating one or two advisors at $300K helps.  I think (and this is just my personal opinion), that those firms are looking to reduce overhead with larger reductions.  Reducing one low producer in an office of 25 guys does nothing.  Eliminating 2,000 low producing FA’s allows the home-office to reduce support staff, possibly eliminate and consolidate branch offices/branch managers, etc.  Keep in mind that lower producers often area  larger drain on overhead - they typically don’t have as much support staff in the branch to get things done.  Think about it…what takes more overhead, a team of 5 million dollar producers that have a staff of (team paid) support personnel, OR 5 300K producers that don’t have any dedicated support staff?

  I think they like teams and big producers for this very reason - less to support, and the teams pay for a lot of their own support staff.
Apr 24, 2009 12:41 pm

You’ve lost me as to why NOT having dedicated support staff is more expensive.

  Surely the $1.5mm produced by the five solo guys more than covers their portion of the branch's annual expenses.
Apr 24, 2009 12:52 pm

Keep in mind that not every dollar of revenue leaves when an FA leaves.  Generally, a $300k producer, maybe the firm continues go generate at least 1/2 of that and now has less overhead, etc.

Apr 24, 2009 1:31 pm

This is why I would think that the firms have a number for each advisor that says this is our breakeven.  If advisor x does $xxx GDC it would cover all of the expenses related to having that person as an employee (sa's and anything else) and anything above that is profit.  I've always felt that the advisors are the profit centers of a firm. 

My question is if an advisor at AGE needs to produce $160m in GDC to be profitable to the firm, if he does $300m GDC the extra $140m is profit for advisor and firm.  Why would you fire him?    If I understand B24 correctly and I'm not sure I do but are you saying they are firing low producers so that they can trim staff all down the line from sa's to trading desks to compliance?  It still doesn't make sense to me, X amount and this guy is profitable, anything below we cut, they are a drag on our profit, anything above and he is adding value. 

Apr 24, 2009 2:41 pm

B24 works for EJ (and has only worked for EJ in this industry)…hard to be a real expert on wirehouse strategy.  In your example, the $140k is NOT all profit to the firm since they have to give 50-60% back in the form of comp, benefits, etc.  I’m not privvy to all the decisions, but think of it this way:  if you have an average client size of $100,000, do you really want many $10,000 accounts?  They may add a few bucks and not take any time (“profitable”), but each of those has a call option on your time and really your career (they sue you out of the blue).  I know the wires typically shoot for a certain gross margin (say 20% in the “old” days)—so a $250k producer would then only have a $50k profit/year.  Each firm has decide if that is worth it to keep them around.

Apr 24, 2009 5:02 pm

Cowboy, give me a break.  I had a lengthy career in corporate finance before this, so I didn’t just fall off the turnip truck into Edward Jones land.

  To answer your question Borker, I realize that may not have made sense, but here goes:   At many wirehouses, large teams have their own dedicated staffs.  For example, a team of 5 or 6 high-producing FA's might have a support staff of 4 or 5.  Although they are "employees" of the firm, their pay comes out of the production of the team, not out of the overhead of the firm. A single FA might (or might not) have one support person, paid by the firm (not out of their production).  And that large team probably doesn't need the resources (as much) of the home office because they have very capable support staff on their team that can deal with most issues themselves.  The one-man band FA probably uses home-offce support much more, as well as the one firm-paid assistant he has.  So 5 single FA's probably costs more in overhead TO THE FIRM than the team with 5 FA's.   And the natural progression to higher production is higher average account sizes, fewer clients (per dollar of production), fewer transactions (per dollar of production), etc.  It's all interrelated.  It's like any business....higher tickets equals higher profit. eliminating as many small-producing single-FA's, you have the ability to reduce overhead both at the home office and in the field.
Apr 24, 2009 5:14 pm

Keep in mind that not every dollar of revenue leaves when an FA leaves.  Generally, a $300k producer, maybe the firm continues go generate at least 1/2 of that and now has less overhead, etc.

  Seems like this would be the key. The smaller the producer, the larger the client retention by the firm. These clients generate trails to put against (lower) fixed costs. I'm not saying the Titans would even have time to work the leaving broker's book, but I'll be they could squeeze the top 20% of the residual pretty good.
Apr 24, 2009 5:24 pm

B24, while I can agree with some of your comments I beg to differ with you on the single FA and his/her support staff.  You give the impression that each 300M producer is given their own sales assistant.  In any wire I know of that’s not true.  It takes a million gross to have a dedicated CSA and only if you rub elbows with management well. 

  We have shared CSA's working for 5 brokers that have aggregate gross north of 2MM.  They're probably earning about $24M annually from the firm and another $12M from the FA's.  If you prorate the salary of $24000 down to a single $300,000 broker then the cost of the CSA (without benefits) is $3,600.00.   Now take another look at the math.