In the past, teams have been regarded by many financial advisors — the old-school ones, the ones who built their books on their own — as a trap. A trap created by management to prevent reps from migrating from one firm to another.
That description, while not dead, is certainly in decline. Teams are growing in popularity because, broadly speaking, they are more efficient and provide a better level of care to clients. At least that is what proponents of teams are arguing. For example, a 2008 survey at RBC Wealth Management found that its advisors who were on teams had 69 percent more assets under management and generated 46 percent more trailing 12-month commissions than advisors who weren't on teams. Among high-net-worth clients at RBC, 36 percent said it was important that their advisors be part of a team.
A research partnership led by Cerulli Associates showed that team or ensemble practices made up 58.2 percent of advisors at wirehouses in 2009, with the rest performing as solo practitioners. Among registered investment advisors, the split between teamed and solo advisors was roughly half. Some brokerages have special programs to encourage their growth; last fall Merrill Lynch launched a “Winning Through Teaming” website on its intranet that provides support and companywide contacts for Merrill advisors looking to make business connections within the company.
But all the love that the industry shows to the concept of teaming doesn't appear to extend to setting up more attractive compensation designs that might draw more brokers into the fold. With few exceptions, brokerages pretty much have the same comp system in place for teams that they have for individual brokers. A solo practitioner is paid for his production on the same grid structure as employees who work on teams.
Two exceptions are Morgan Stanley Smith Barney and UBS Wealth Management Americas; the two wirehouses allow junior members of teams to be paid at the same payout rate of production as senior members in some cases, a difference that can add 10 percentage points or more to the juniors' comp plan. At brokerages that don't distinguish on pay between solos and teams, the rationale is that a separate compensation system is unnecessary for teams because team members already tend to earn more than they would if they stayed solo.
From “Frenemies” to Partners
It's a rationale that some team members agree with. Thomas Rietano and Trevor and Wayne Nelson are partners at the Nelson-Rietano Group, a three-partner Merrill Lynch team in Washington, D.C., with $2 billion in assets under management. The group formed 10 years ago after Rietano and Trevor Nelson found themselves bidding for the business of the same corporate client. (They joined forces and were able to sign up the client.) Both advisors say they “absolutely” think that teaming was their best course. And since joining forces, they added a third partner to their team.
For now, Rietano says the revenue is not evenly split. They're working toward a one-third split each, but aren't there yet. “We feel like our compensation couldn't and wouldn't be as good as it is if we weren't partnering,” Rietano says. “Irrespective of the grid, we're able to do more business, because we work together. I think if there's a sense that everybody is working toward the same goal and working hard, [compensation] works itself out. Where it doesn't is when someone goes into the partnership as a way to kind of take their foot off the gas and not be any worse off for it.”
Andy Tasnady, a compensation consultant with Tasnady Associates of Port Washington, N.Y., said the key to growing profitably on teams is to partner with advisors who possess different skill sets. Such a move is becoming increasingly necessary as markets become more complex. “You just can't serve a lot of big clients unless you have a team. There's a math behind it. You can be a $300,000 salesperson on your own, but it's very hard to be a $3 million salesperson on your own,” he says. “It's harder and harder to break into this business as an individual. To make that transition from doing $200,000 to $500,000 as an individual is very hard.”
The compensation models of wirehouses and brokerages are uncommon in the RIA universe, says Michael Paley, senior vice president at Focus Financial Partners, a wealth firm aggregator, offering back-office support and consulting to advisories in return for a stake in the business. That's because, unlike advisors at wirehouses, senior FAs at RIAs typically have equity stakes in the firms where they work, and compensation is often based on the overall performance of their firms rather than the revenue generated by specific clients. (Wirehouse advisors often have shares in their firms, but they are not owners in the true sense of the word.) Issues unrelated to production, such as supporting the culture of the firm, also matter more, Paley says.
“The wirehouse world is all payout model. In the RIA world, it's much more closely aligned with what we want to be as a firm,“ Paley says. “By and large, RIAs are fairly small entrepreneurial organizations, and they've been constructed with very different purposes in mind. In many regards, the vast majority of RIAs would say that the firm itself is the team.”
How to Pay?
Successful teams that are looking to move to other firms are more likely to get better offers from rival brokerages. But compensation issues surrounding teaming pose their own dilemmas, some consultants say. The way teams are organized can be a big part of the problem. Teams with vertical structures tend to have a single senior advisor as the leader; he often collects the payout from the business based on the entire team's production and divides it up among the staff. The leader may qualify for retention bonuses, stock options, and other benefits that those below him may never share in. Some people would feel overlooked or underappreciated.
On teams with horizontal structures, several partners may split up the production by mutually agreed upon percentages. But the sum of the parts can be less than the whole, payout-wise. Two advisors splitting, say, $1 million in production would receive payouts based on $500,000 each. Of course, that means neither of them would qualify for bonuses that kick in at the $1 million production level. In the view of some, it's a good deal for the employer who doesn't have to pony up the extra cash.
The effort to head off the resentment that some compensation arrangements can produce on teams was part of the reason that UBS Wealth Management Americas adopted its policy of letting junior team members earn the same percentage payouts as senior members, says Jeffrey Rohwer, the division's head of field development and talent management. The policy emerged after UBS began a close review of its team structure about three years ago. Rohwer says advisors on teams told the company they weren't getting the support they needed to grow. UBS responded by creating a series of programs structured according to the teams' needs, from startups to more experienced groups. About a third of UBS's advisors are in formal team structures, while another third partner situationally with colleagues.
Rohwer estimates that teams are 20 to 30 percent more productive than their solo counterparts. “I think we perceive this as extremely important to the firm,” he says, “but it isn't something that we mandate.” Staying solo isn't an option everywhere, however. Citigroup's bank brokerage has said it plans to transition to fee-only advisors by 2011 and have them work in teams of seven or more, or accept smaller pay.
Brokerages tend to let team members decide their compensation arrangements for themselves, industry experts say. Raymond James & Associates, the employee b/d unit of Raymond James, has no overriding rules on comp other than what labor law dictates, says Scott Curtis, senior vice president of the firm's Private Client Group. For example, brokers cannot determine someone's compensation after it's earned. A two-man team that had a great quarter couldn't decide after the fact that one should get the lion's share because the other is looking to lower his tax liability. “That's against the law,” Curtis says.
Raymond James doesn't have a special compensation policy for teams, although it's considering new recognition opportunities for team members, Curtis says. A recognition club member at the top of a vertical team sometimes can send a team member to club events for significant performance. Disputes about pay, Curtis says, occur less often than might be expected.
“The compensation typically has already been determined according to some formula. That's almost not disputable,” he says. “The friction I hear amongst teams is less about compensation and more about responsibility, and who is responsible for what, and who owns which task. ‘Let's make sure, if there's a follow-up that's due with a client, that someone indeed followed up with that client.’ If there are tasks that are supposed to be performed and they don't get performed, the friction arises around people pointing fingers at one another and saying, ‘I thought that was your responsibility.’”