Management of A.G. Edwards is trimming its compensation and raising the performance expectations it has on brokers. As the brokerage industry moves upmarket and seeks better return on equity and profit margins, the pressure for reps (and their firms) to produce continues to increase.
At A.G. Edwards, where compensation ate up 64 percent of net revenue in the third quarter, reps are being asked to put up bigger numbers going into the new fiscal year. According to published reports, effective April 3rd, the firm is raising the minimum ticket order that a rep can be paid on to $55 from $42 and penalizing underperforming producers: Reps with at least 10 years experience producing less than $175,000 will be docked eight percentage points on the payout grid, up from the current 5 percent penalty.
At the same time, the firm is raising the bar for top producers: Where $300,000 producers received retroactive bonuses on production above $150,000, they now receive that bonus on business above $175,000. Additionally, minimum production requirements for reps to get into the firm’s elite recognition clubs have gone up significantly. To be a part of the President’s Council, reps now must do at least $550,000 in gross production, up from $475,000. And to join the Chairman’s Council, reps must now do $800,000 in gross production, up from $700,000.
While these moves will irk reps, analysts applaud them as a necessary defense for firms, especially regionals like A.G. Edwards, in an increasingly margin-focused industry. Brad Hintz, an analyst with Sanford Bernstein, who has an “underperform” rating on A.G. Edwards’ stock, says regionals need to make these improvements if they don’t want to be swallowed up. “You look at Advest and Legg being bought by Merrill and Citi, if those two experiments work out you could see more of the regionals getting swept up,” he says. “The only way to avoid this is to increase ROE and going after compensation is one good way to do that,” he says.
Compensation costs, which consume between half and two-thirds of many brokerage firms’ net revenues (48 percent at Merrill Lynch in the fourth quarter), have been a target of equity analysts’ criticisms in recent months. Morgan Stanley’s Chris Meyer wrote in a September report that brokers “extract too much of the economics” of the firm and leave little leftover in the way of shareholder returns.
According to Keefe Bruyette & Woods analyst Lauren Smith, A.G. Edwards spent $430 million, or 63.8 percent of its $674 million net revenue, on compensation. That’s an improvement from the prior quarter’s 65 percent ratio and also the 64.5 percent figure for the same time last year. Smith writes in her report the firm actually beat their 65 percent estimate for the third quarter, a good sign. And while the firm missed Smith’s total net revenue expectations by 5 percent, lower compensation expense helped to offset this, according to her report. Says Hintz of the compensation cutting: “Is it a trend? Brokers don’t want to hear that it is, but, in the interests, of the business I hope so.”