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Smaller Advisors On The Firing Line

It used to be that financial advisors never got fired. That’s because, how did the saying go? As an advisor, “You eat what you kill.” Times have changed.

It used to be that financial advisors never got fired. That’s because, how did the saying go? As an advisor, “You eat what you kill.” In short, all but the lamest advisors were revenue producers for their firm, and FAs only get paid on the business they bring in. After a while, the ones who didn’t have any business, well, they had to do something else—they didn’t make enough money to pay their bills. Simple as that.

But these days, financial services firms—the big names, at least—are letting the bottom quintiles (or so) go—much to the delight of independent broker/dealers who are very happy to pick up $200,000 to $300,000 producers. For example, UBS is currently in the midst of cutting some 2,000 employees in its wealth management division—many of them financial advisors. Sources indicate the bulk of these rep layoffs—scheduled to take place this week—are based on production and length of service. Word is that UBS reps with at least $250,000 in trailing 12-month production and up will be okay, but, yet, many $300,000 producers at UBS are still in fear of their job. Other wirehouse firms have taken similar steps.

Call it financial Darwinism, as advisors around the $300,000 in 12-month trailing- production mark can no longer consider themselves safe at the national, full-service firms. Below that level, FAs have seen their payouts cut in half since last year. As one advisor on Registered put it: “Most big firms are forcing ‘voluntary’ layoffs through changes to their grids. At many firms, producing under 300K is now impossible to live on.”

For example, Merrill Lynch tweaked its payout grid in December, lowering the payout by half for advisors who have been working there for six years but produce just $200,000. Now they only get paid 20 percent of production and just 25 percent of production if they produce $200,000 to $299,999. The grid further punished the six-year veterans who produce $300,000 or less. Furthermore, advisors who have 10 or more LOS and produce $300,000 to $399,999 will receive a 35 percent payout. According to one advisor on our forum, “Most [lower producing reps] have left because their payout was cut severely because of the penalty box.” (The “penalty box” refers to when an advisor’s business drops to a lower rung on the payout grid due to market forces.)

Citi’s Smith Barney has also been bleeding smaller producing advisors. As reported in its Q1 earnings, the total financial advisor headcount dropped to 12,659 in the first quarter, a 17 percent decrease from last year, and a 13 percent decline versus Q4 of last year. The firm says an overwhelming number of departing advisors were at the lower-end of the production spectrum.

Indeed, in addition to payout cuts and attrition, lower producing advisors are also getting the shaft from a recruiting perspective at the wirehouses. Mindy Diamond, head of recruiting firm Diamond Consultants in Chester, N.J., says major firms are not recruiting below the $500,000 [in trailing-12 production], unless the rep is a young rising star. “Three-hundred-thousand seems to be the number that is being bandied about, where we hear of people who might be vulnerable of losing their jobs,” says Diamond. “From these guys’ perspective, they’re just not feeling the love, they’re in the penalty box, and we’re not even sure how they’re earning a living.”

Alois Pirker, senior analyst at the Aite Group, says more than ever firms are focusing on making sure top producers stay. After all, the profitability of the financial advisory business is built on scale. Pirker says the whole game seems to be: “‘Let’s make sure the top producers are staying and, the low ones, well, we can’t really do much about them.’”

That said, even though lower-end producers are not welcomed at the wirehouses, Diamond says there is interest in these advisors at the regional and independent firms. No doubt, those advisors would be wise to look into indies. A rep on our Advisor Forum says most of the advisors in his office that fell into the “penalty box” have left and gone to independent firms where, he says, “the payouts are almost triple of what the penalty box grid is.”

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