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Survivor's Market

What makes a broker successful? Age, experience, years at one firm, education--the more of all those things, the better. One other helpful hint: It's not where you work, but how you work that is important.

For William Lange, a 36-year veteran and a million-dollar producer for Morgan Stanley in Naperville, Ill., the past several years have been some of the worst he has ever seen. “The 1970s were worse, but this is pretty bad,” Lange says.

The bear has taken a toll on Lange's book, although a muted one, given his years of experience and the strength of his practice. However, even veterans like him are making painful adjustments. When one of his two assistants died, he didn't fill the vacancy for a year. “I'm taking a haircut, but I kept the accounts,” says Lange. And he's moving clients back into stocks from bond funds. “I have a strong feeling the market's turning around,” he says.

In many ways, Lange represents what our annual compensation survey tells us about the best reps: They have seen the markets collapse around them, they've seen investor confidence shaken, they've taken their lumps (along with their clients), they're optimistic and, ultimately, they know how to help their clients — and, therefore, themselves — survive.

In last year's broker comp survey, Registered Rep. warned that the lowest-producing brokers faced the ax. That prediction proved accurate. With volume low and retail investors sidelined, Wall Street extended its cost-control programs beyond idle investment bankers and back-office staff to low-producing brokers. Overall securities industry employment fell to 705,700 in February 2003, a 10 percent drop from the all-time high of 786,100, in April of 2001, according to the U.S. Department of Labor. The 1987 market crash resulted in nearly 40,000 net job losses as compared to 80,400 lost since April 2001. But the 1973-1974 bloodletting was worse. In the years following that bear market, the industry shed 34,400 jobs — or 17 percent of its workforce.

To see how surviving brokers are faring, Rep. invited readers to participate in our annual salary survey. Nearly 900 professionals responded to the email invitation in March, giving us a response rate of around 8 percent. The majority of respondents (67 percent) classified themselves as stockbrokers, reps or financial advisors. The next largest group of respondents, at 12 percent, categorized themselves as financial planners; 4 percent called themselves executives (such as president, chairman or CFO).

Extrapolating from our survey results, we created a picture of the average rep. Our sample found that the typical broker is a male, aged 44, has a Series 7 (90 percent) and works for a wirehouse (defined as having more than 800 reps) or regional brokerage (from 100 to 799 reps). The majority (60 percent) are college graduates and nearly a quarter have master's degrees or higher. Only a small percentage (19 percent) have advanced professional qualifications, such as the CFP or CFA, which surprised us given how much energy the firms have put into convincing reps that continuing education will be key to thriving in the 21st century.

Bad News/Good News

On average, respondents said total compensation in 2002 grew by 3.5 percent over 2001. However, median assets under management plummeted. Hidden in that sunny arithmetic mean is some serious carnage: Just over a quarter of responding reps indicated that total comp had fallen between 10 percent and 39.9 percent during 2002. How did the mean show an increase? In an anomaly for the annual survey, Rep. found that a group of heavy hitting respondents pulled the total comp and other averages upwards. This is why we focus more on the median results — the data that fall in the middle of a series — to isolate such outliers. The median shows quite a different picture. As one might expect, assets under management continued to fall in 2002, as they did in 2001. For responding brokers, the median assets under management plunged to $25.5 million versus nearly $43 million last year. Gross production in 2002 slipped to $216,379, down from $269,500 in 2001.

The numbers aren't surprising, given that retail investors basically went on strike for the last three years. Brokers like Lange of Morgan Stanley might indeed be seeing an uptick in client interest in equities. But they will have to do a lot of buying to restore decimated broker books. One indicator of the carnage: Stock funds suffered a net outflow of $27.10 billion in 2002, the first full year of net outflows since 1998, according to the Investment Company Institute. The outflows have continued this year too.

“It's a survivor's market right now,” says Andre Cappon, president of The CBM Group, a financial services consulting firm that helped analyze our survey results. However, that's not altogether a bad thing, as the industry prepares for the (hoped for) end of the bear market — a milestone that some market watchers say has been reached. “Certainly, this has weeded out the more speculative brokers, people who had become six-figure producers by pushing high-beta stocks,” says Cappon. “The surviving sales force is probably much stronger.”

How are Rep.'s readers faring in this Darwinian struggle? They share a few basic survival tactics. The first was taking a more conservative approach, which usually entailed a reduction of equity exposure. “There was an obvious pullback from technology,” says one Morgan rep. “We also went towards safety, a lot of bonds, annuities and fixed income products.” A UBS broker in California concentrated on getting investors to stick with the good investments they did have, rather than risking huge losses. “I didn't focus on the sizzle, I sold the steak,” he says.

Advisors who didn't hide under their desks and kept their clients focused on a comprehensive long-term investment strategy found they were rewarded with more referrals from their clients. “Last month I had the best month in three years. A lot of that was from referrals,” says a UBS broker in Kansas. “People knew I didn't just create activity.” Another broker said he hasn't made a cold call in over a year. “I hadn't been requesting referrals,” he says, “so I made the decision to start asking, and it has been very important.”

Finally, it's clear that surviving brokers are not one-trick ponies. “I couldn't say there was one thing that helped us stay afloat,” says a Morgan rep. Stephen Facella, a broker with A.G. Edwards agrees. “You have to have knowledge of all the different products and you have to know your clients,” says Facella.

Another useful nugget: It seems that the brokers whose practices encompass multiple styles (fee-based, mutual funds, commissioned transactions, fixed income) have done better than reps who stick to one style. Median compensation levels from wirehouse, regional brokerages and independent registered investment advisor respondents were roughly equal (see chart at left). The interesting discovery: The group of respondents who earned the most said their practices offered a mix of managed money, C-share mutual funds and commissions (see chart).

The worst earners? No surprise here: respondents who characterized themselves as “mostly” commissioned-based reps.

Overall, brokers who had a strong concentration in managed accounts did well. But those who were most concentrated in that business were not the top earners. Those who said that 90 percent or more of their business was fee-based ranked second in median income. Reps with between 40 percent and 49 percent in managed accounts did best. The next best performer was the group who said it had 60 percent to 79.9 percent wrapped in a fee.

Russ Alan Prince, of Prince & Associates, a financial services market research firm, and also a columnist for this magazine, says it's not surprising that too much concentration in managed accounts — or any other type of investing — would not get the most money from clients, who are leery of cookie-cutter planning. “It's much better to customize planning solutions for clients if you can offer not just mutual funds, but ETFs, insurance, derivatives, private equity or whatever,” he says. “Those clients won't take that business someplace else.”

Doug Sieg, head of national sales of Lord Abbett, meets hundreds of advisors a year and says he can see that brokers who have a grasp of many types of investing and financial-planning products are pulling away from the pack. “Holistic advice is a premium in this market, and high-net-worth clients are seeking advisors who can provide it,” Sieg says.

The major firms are clearly encouraging such an approach by broadening their product offerings. Merrill, for example, has Total Merrill. Smith Barney has its Consulting Group (see cover story). And UBS (which recently dropped the PaineWebber name) even has a new unit, Art Banking and Numismatics, to help clients buy and sell art and coins. “It's not just about AUMs, managed accounts or mutual funds or stocks and bonds,” Prince says, “it's about taking a broader perspective, offering more services, the wealth management model.”

Whatever the financial advisor's style, experience is a major determinant of income. It's simple: The longer you've been in the business, the more you are likely to pull down. Brokers with less than five years are taking their lumps. Median compensation for reps in the business less than five years was $59,411. Almost 83 percent made $99,999 or less in 2002. In comparison, reps with between 10 and 15 years under their belts had a median compensation of $134,677. Reps above the age of 40 also tend to make more money. Oh, and gender matters, too. Male respondents in 2002 made total comp of $124,812, more than their female counterparts, whose median was $104,808.

What else does the compensation survey reveal? One finding that pops out of the data is that payout rates and production are not correlated. In other words, you might keep more of what you make at some independent firms, but you're likely to have a larger practice and a greater paycheck at a wirehouse, despite the smaller payout ratio. Respondents who reported receiving 40 to 49.9 percent payouts (about what the top reps in wirehouses get) had a median total comp of $189,442, the highest of all respondent groups. The group that gets 80 percent or more payout had $170,689 median comp. A statistical bias of the survey? Perhaps. But the 30 to 39.9 percent average payout group netted more than the 60 to 79.9 percent group ($119,922 median total comp v. $111,905 for the latter). Why could this be? Because when a rep goes indie, he also has to pay his own rent, buy and maintain his own computers and the like. Wirehouses typically take 60 percent of gross production, but they also provide far more support, including national advertising, access to more products, and extensive back-office resources.

Overall, surviving reps remain optimistic about what the future holds. While a little less than half of respondents experienced any sort of increase in compensation in 2002, over 75 percent of respondents believed their compensation will go up in 2003 by an average of nearly 15 percent.

Blind optimism? Perhaps. Last year over 80 percent of respondents believed compensation would rise. On the other hand, it's almost unnatural for a sales person not to be upbeat. “I wouldn't want a sales guy who isn't optimistic,” says Michael Herman, a consultant who runs the national financial services sales force effectiveness division of Deloitte & Touche.

And, in fact, there may be more reasons to be cheerful this year. After years of cutbacks, firms are reaching the limits of what they can do in terms of belt tightening. “I think firms have all cut back as much as they reasonably can at this point,” says Cappon.

Also, when the business comes back, there will be fewer brokers at those firms to compete for it.

“There's a huge amount of cash on the sidelines,” says Jim Guilfoil, of Frank Russell Co. “Can you convince people to invest? That's the big question right now.”

Profile of the Typical Broker

From the Registered Rep. 2003 Compensation Survey

  • Age: 44

  • Sex: 83% male

  • Education: 60% have Bachelors Degrees; 23% have graduate degrees; 19% have advanced professional qualifications (CFP, ChFC/CLU or CFA)

  • Years in the business: median 9, mean 11.5

  • Assets Under Management (AUM): median $25.5 million, mean $52.7 million

  • Gross Production: median $216,379, mean $327,144

  • Gross/AUM: .62% - .85%

  • Payout: median 39.9%, mean 47.6%

  • Compensation (Including commissions, fees, deferred comp bonus): median $110,238, mean $155,176

  • Length of Service: 55.2% have been at the same firm for the last five years

Mean Assets Under Management: $56.2 Million

$ in millions Registered Rep/Stock Broker/Financial Consultant/Financial Advisor Manager Branch Financial Planner RIA Chairman/CEO President/Partner/COO/CFO Total
Less than $10 26.5% 17.8% 25.8% 18.8% 25.6%
$10 to $49.9 43.6 44.5 49.6 31.2 43.1
$50 to $99.9 14.2 23.3 15.2 3.1 14.4
$100 to $149.9 7.1 6.7 3.3 21.9 6.8
$150 to $199.9 2.3 2.2 0.7 0 1.9
$200 to $299.9 2.5 0 1.3 3.1 2
$300 to $399.9 1.4 0 1.3 3.1 1.3
$400 or more 1.5 5.6 1.3 15.6 2.9
No answer 0.8 0 1.3 3.1 1.7
Total 100 100 100 100 100
Estimated Mean $52,751,278 $62,277,778 $43,053,691 $119,435,484 $56,245,714
Estimated Median $25,500,000 $30,100,000 $22,900,000 $45,000,000 $25,600,00

Profile of the Typical Branch Manager

From the Registered Rep. 2003 Compensation Survey

  • Age: 47

  • Sex: 92% male

  • Education: 62% have Bachelors Degrees; 20% have graduate degrees; 9% have advanced professional qualifications (CFP, ChFC/CLU or CFA)

  • Years in the business: median 15 mean 16

  • Assets Under Management (AUM): median $30.1 million, mean $62.2 million

  • Gross Production: median $231,249, mean $402,247

  • Gross/AUM: .65% - .77%

  • Payout: median 43.8%, mean 54.4%

  • Compensation (including commissions, fees, deferred comp, bonus): median $167,187, mean $205,222

  • Length of Service: 45.6% have been at the same firm for the last five years

Mean Gross Production: $344,643

Registered Rep/Stock Broker/Financial Consultant/Financial Advisor Branch Manager Financial Planner RIA Chairman/CEO President/Partner/COO/CFO Total
Less than $149,999 37% 25.60% 41.70% 28.20% 37%
$150,000 to $249,999 19 26.7 15.3 6.3 18.1
$250,000 to $299,999 8.4 8.9 6.6 12.5 8.1
$300,000 to $399,999 9.6 10 8.6 3.1 9.1
$400,000 to $499,999 6.7 5.5 8.6 0 6.5
$500,000 to $599,999 4.4 7.8 7.9 9.4 5.4
$600,000 to $699,999 2.7 2.2 2.6 3.1 2.6
$700,000 to $799,999 2.9 1.1 0.7 0 2.2
$800,000 to $899,999 1.5 1.1 1.3 3.1 1.5
$900,000 to $999,999 1.5 0 0.7 6.3 1.3
$1,000,000 or more 4.7 10 5.3 15.6 5.9
No answer 1.5 1.1 0.7 12.5 2.5
Total 100 100 100 100 100
Estimated Mean $327,144 $402,247 $330,333 $627,679 $344,643
Estimated Median $216,379 $231,249 $210,714 $287,499 $215,432

The more experience a broker has, the more he makes.

Years since first licensed: Less than five five to nine 10 to 14 15 to 19 20 or more
Estimated Mean $74,040 $135,853 $173,922 $213,211 $242,842
2002 total compensation
Estimated Median 59,411 110,638 134,677 121,875 140,714
2002 total compensation

The best business model is one that offers a mix of investment solutions, from managed accounts to transactions.

Percent of assets under management that is fee based 90% or more 75% to 89.9% 50% to 74.9% 25% to 49.9% Less than 10%
Est. mean total comp $157,477 $199,625 $193,248 $182,185 $133,813
Est. median total comp $123,214 $143,749 $148,957 $145,312 $93,399

Compensation v. Average Payout

A higher payout does not necessarily result in higher compensation.

Avg. Payout Less than 20% 20% to 29.9% 30% to 39.9% 40% to 49.9% 50% to 59.9% 60% to 79.9% 80% or more
Est. mean $70,436 $80,531 $148,074 $224,518 $137,816 $138,966 $228,163
Est. median $58,333 63,225 $119,922 189,422 87,499 111,905 170,689
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