House explores bonuses at brokerage firms

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Feb 8, 2009 1:57 pm
In the shadow of the Obama administration's efforts to curb compensation for top executives at bailed-out financial institutions, lawmakers are examining payouts at the retail-brokerage operations of those firms.

The House Committee on Oversight and Government Reform is reviewing some of the industry's pay practices — such as awarding large retention bonuses and recruitment packages to advisers, said Ronald Stroman, staff director for the committee, which is headed by Rep. Edolphus Towns, D-N.Y.

At the heart of the issue is whether such payments would impede a financial institution from using bailout funds for their originally intended purposes: to stabilize their businesses and defrost the credit markets.

"It's one of the primary issues that the committee has targeted to look into," Mr. Stroman said.

A formal hearing has not yet been scheduled, but Mr. Towns' committee is looking at how brokerage firms determine retention and recruitment packages for representatives and whether they are appropriate in the context of the current financial crisis.

"It's a somewhat logical progression, and it's low-hanging fruit for lawmakers right now," said Alan Johnson, chief executive of Johnson Associates Inc., a New York-based compensation consulting firm that services the retail-brokerage industry. "It's politically attractive to align yourself with Main Street."

Scores of politicians have been zeroing in on Wall Street compensation practices in recent months, but it has come to a head in the last two weeks. After a report from New York State Comptroller Thomas DiNapoli on Jan. 28 revealed that Wall Street firms paid out $18.4 billion in cash bonuses for 2008, President Obama labeled the payouts the "height of irresponsibility" and "shameful."

Last week, the president moved to limit the pay of executives at bailed-out companies even further. The brokerage industry, however, has managed so far to escape the spotlight.


But more information is now surfacing about multibillion-dollar retention packages, such as the $3.6 billion in payouts awarded to reps at Merrill Lynch & Co. Inc. last month to keep them from leaving after the New York-based firm was acquired by Bank of America Corp.

Charlotte, N.C.-based BofA has received $45 billion in federal funds over the last four months.

At the same time, details are also emerging about recruiting packages that wirehouses have been using recently to lure reps from rival firms — packages that in some cases, observers noted, have hit astronomical levels. "Some of these deals have been unprecedented, said Steve Insel, a lawyer at Jeffer Mangels Butler & Marmaro LLP in Los Angeles who specializes in transitioning investment advisers.

He noted that in recent months, he has worked with reps who were given, at times, recruiting payments with a value of up to 300% of their commissions over the previous year. And the majority of these payments were granted up-front, he added, with a significantly smaller piece based on advisers' ability to bring their assets under management with them to their new firm.

"It hit a peak near the end of last year that I've never seen in my 30 years in this industry," Mr. Insel said.

Industry sources have said that the brokerage businesses of Morgan Stanley and UBS Financial Services Inc., both based in New York, have been the most aggressive in issuing recruiting packages, but added that the values of these deals have come down somewhat in the last month.

A spokeswoman for UBS did not return a call for comment; Christy Pollak, a spokeswoman for Morgan Stanley, said the company does not comment on recruiting packages for competitive reasons.

While lawmakers may be inclined to look at such industry pay practices, retention and recruiting packages should not be lumped in with the broader focus on Wall Street compensation, contends Rick Peterson, founder of Rick Peterson & Associates, a Houston-based brokerage industry recruitment specialist.

For one, he said, they're generally structured as long-term deals, and, in the case of retention packages, they're also structured as loans that require reps to stay with the firm for years before earning the payment in full.

"And when a rep has built up a significant book of business, you have to do something to induce them to join your organization, or stay with you after a merger," Mr. Peterson said of recruiting payments in particular. "You're essentially purchasing a stream of revenue, and that's not the same thing as awarding someone a bonus."

By awarding large payouts, wirehouses are "making a business decision to shrink their margins a bit," said Danny Sarch, founder of Leitner Sarch Consultants Ltd., a recruiting firm based in White Plains, N.Y. "But in a very competitive environment, it's critical for these firms to do what it takes to get new assets in the door and maintain their existing assets."

It's perhaps likely that retention payments will end up getting the bulk of the attention from lawmakers, because these packages are paid out in massive, single sums, said Andy Tasnady, founder of Tasnady Associates LLC, a Port Washington, N.Y.-based compensation consultant.

In addition to BofA's $3.6 billion in retention payments, Morgan Stanley and Smith Barney, also of New York, are expected to offer reps $2 billion to $3 billion to stay with their firms when the two form a joint venture later this year.


New York-based Citigroup Inc., which owns Smith Barney, has received $45 billion in federal aid, while Morgan Stanley was given $10 billion by the government last year.

Whether lawmakers see the business rationale behind these industry pay practices remains to be seen. "This is about headlines and it's 100% politics," said Mr. Johnson. "Congress wouldn't know appropriate retail-brokerage practices if it bit them in the heinie."

Feb 8, 2009 2:51 pm

This link to this story was posted today by Namadi.  For some unknown reason, the link disappeared, but the story can be found at  In the end, the jokers in DC will make some noise but that’s about it.  They’ll figure out the difference between executive bonuses and forgivable loans to brokers.  If Washington has a major impact on us, it will more likely be action to bring back some of the Glass Steagall provisions.  Consider this…Washington decides to unbundle the universal bank model because of the inherent risks of allowing banks to become too big to fail.  If so, WS (AGE) will be cut loose from the bank and independent once again.  Sounds crazy…might work!

Feb 8, 2009 4:08 pm

What congress should be spending time on is going through the huge trillion dollar Spendulus package… examining it line by line scrubbing it of every earmark, pet project, and non stimulus item – naming the persons specifically responsible for slipping them in.

  And should vote on a mandatory audit of every member of congresses taxes.
Feb 8, 2009 11:05 pm

And cabinet member and everyone in DC with a title of assistant to the undersecretary and above. I think SS will be paid in full going forward.

On a serious note - I also think all firms and companies receiving TARP/TALF should be banned from making any and all political contributions, to include 527’s, parties and candidates. No PAC’s no Lobby Groups either. This should apply to the teller up through the CEO as well as immediate family members of the same. Penalties should be at the same level as bribery for the “donor” and “donee.”

Feb 9, 2009 10:32 am

It’s just one more grab by the liberals who are in power for the next two years to push this country a little closer to the socialist side.  It’s the way these people work. 

Feb 9, 2009 11:24 am

Politicians love to get their arms up over anything that compensates anyone above the national average.  This is not about TARP.  It's about Democrats not wanting people to make a lot of money.

The problem, which will not get rectified in the public eye, is that upfront money and (to a lesser extent) retention bonuses are being paid to and for "businesses".  Brokerage firms consider each advisor to be a little business unit.  If you didn't pay upfront money to single advisors, then the same rationale would hold true for the purchase of entire firms.  So I guess BAC should not have paid Merrill for all their advisors??  The Morgan/SB merger should have no exchange of capital?  But politicians just LOOOOOVE to sink their teeth into this kind of stuff.
Feb 9, 2009 2:20 pm

Dems just want more political contributions from wall street. Dimon and Ken Lewis have contributed alot to them already

Feb 9, 2009 2:40 pm

As soon as you crawl into bed with the federal government, this is exactly the kind of thing you should expect.  I hate Washington, and wants them out of our lives.  I would prefer that not a single taxpayer dollar go to Wall Street, and we let these firms that are “too big to fail”–fail.  We could be out of this in about a year if we let the markets work as intended.

But as soon as Citigroup crawls over broken glass to get big bucks from the rest of us, don’t expect Congress to sit still while big bonuses are being paid to the same retards to brought this calamity upon us in the first place.  There’s only one institution on planet earth more dysfunctional than the United States Congress, and it’s the one that happens to own Smith Barney. 

Feb 9, 2009 2:48 pm

Earth to brokers: It’s all over. You are owned by Uncle Sam. The taxpayer doesn’t want to give you a bonus after your firms blew up the system. The taxpayer wants you dead. If you are the capitalists that you claim, then form your own broker dealer and give yourself that bonus.

Feb 9, 2009 4:30 pm

“bingo”!  buyandhold

Feb 9, 2009 5:47 pm

[quote=buyandhold]Earth to brokers: It’s all over. You are owned by Uncle Sam. The taxpayer doesn’t want to give you a bonus after your firms blew up the system. The taxpayer wants you dead. If you are the capitalists that you claim, then form your own broker dealer and give yourself that bonus.


Let's all write our thanks to  Mr. President Obama, man of hope, inspiration to all us, savior of all from the wrath of their bad decisions. I hear the Soviet national anthem playing.. I need to go salute the mighty one.