IF YOU WORK AT, SAY, MERRILL LYNCH, UBS OR SMITH BARNEY, YOU'VE HAD A LOT OF EXPLAINING TO DO OF LATE. (“NO, WE'RE NOT GOING OUT OF BUSINESS. YES, YOUR ASSETS ARE SAFE AND SOUND.”) BUT THE RETAIL WEALTH MANAGEMENT UNITS, LONG THE UNCOOL COUSINS OF THE INSTITUTIONAL DIVISIONS, ARE SUDDENLY THE SHINING STARS OF WIREHOUSE FIRMS — THEY'RE THE ONES BRINGING HOME THE BACON. NO WONDER MANAGEMENT IS DOLING OUT HIGHER PAYOUTS, INCREASED EXPENSE ACCOUNTS AND OTHER PERKS. THE FIRMS WANT TO KEEP THEIR TOP-PRODUCING ADVISORS FROM DUMPING THEM FOR RIA WORLD AND INDIE-LAND. TODAY, TOP-PRODUCING FINANCIAL ADVISORS HOLD MORE CARDS THAN EVER.
MERRILL LYNCH: ATONEMENT
John Thain has — on more than one occasion — publicly praised the Merrill retail unit. But, just so the retail ranks don't miss the message, he has also made sure to tell them directly how much they mean to him. On a trip to Paris for advisors in Merrill's “Circle of Champions” (which requires a minimum production of $2.5 million), reps say, Thain showed them much love. “John Thain basically told us, ‘You guys are the ones driving the firm right now. I need to let you know that.’ He reiterated that several times,” says one Merrill veteran with $1.5 billion in client assets.
And he should: Compared to other units, GWM is rolling in it — even if results are off a little compared to last year. Compliments are nice … but reps say they're ready for more love in the form of a pay hike. This fall, Merrill will announce a revised compensation package that's rumored to include a higher payout for top producers, in addition to possible “longevity bonuses” — a reward for Merrill veterans who stay at Merrill.
Top advisors may also be able to allocate at least 25 percent of their expense accounts towards charities. “We're on the lists of so many charities that are in search of donations, so this would be nice,” says one advisor with $3.5 billion in client assets.
But perhaps the most significant gesture: Last month, the firm announced that come 2009, its retail investors will be able to sell their auction-rate securities back to Merrill (a voluntary move, as opposed to one forced by regulator demands). More than 30,000 clients hold municipal, closed-end funds and student loan auction-rate securities worth about $12 billion. Merrill says 25 percent of all of its client households in ARS have been out since January, and the overall redemption rate is now about 40 percent.
For some reps, offering a solution to their clients' ARS problems is worth more than, say, a hefty expense account. “For the first time in a long time, working for Merrill Lynch is more of a liability than an asset,” says one advisor. “This will help some of those strained relationships with families and clients.” — Halah Touryalai
Write-Downs: $51.8 billion (through Q2 08)
Common Stock Performance, Trailing 12 months: -60 percent (through 08/08)
Company Profit (Loss) By Unit (second quarter):
ML: ($4.6 billion)
ML Global Private Client: $604 million
Net Client Asset Flows: ($5 billion) in Q2 08
The Merrill Army: 16,690
Avg. Advisor Production: 767,000
Avg. Advisor AUM: $105 million
Perk Checklist:
Increased Expense Accounts: Yes
Sweetened Retirement Plans: No
Stock Option Re-pricing: No
Increased Payout: Yes
Wining And Dining Of Reps: Yes
MORGAN STANLEY: THE COMEBACK KIDS
Advisors say Morgan management is offering small incentives to show their appreciation for the top performing GWM unit — and some bigger sweeteners, too.
“One of the more noticeable among them is that [management] has increased the business expense allowance,” says one 30-year veteran advisor. Other FAs also note an increased allowance in travel and entertainment (T&E), saying that there was never an official announcement — they just began to notice a more generous managerial countenance. (The firm declined to comment on the increased T&E.)
In July, the firm sweetened the deal for veteran advisors looking to retire. The Retiring Financial Advisor (RFA) program enhances payout to FAs who transition assets to an established team. A million-dollar producer with at least 25 years experience and a substantial book of fee-based business can now get as much as a 200-percent payout over five years.
The new generosity of management doesn't seem limited to day-to-day business. Members of Morgan's Chairman's Club (requiring minimum production $1.9 million) were feted at the annual conference this year with a paid trip to London, according to one broker. “It was first class all the way. They picked London, which, right now, is obviously not very cheap,” he says. The trip included a private concert performance by Grammy Award winner Sheryl Crow. “I've been going on these trips since 1987, and this one was exceptionally good. They were definitely voicing to us how important we are to them.”
Advisors agree the subtle gestures of appreciation are likely the result of their strong performance, as well as Morgan's attempts to keep reps from accepting huge sign-on bonuses from competitors. One Morgan rep with nearly $4 million in production, says, “There's a major battle out there for big time producers. It's more than I've ever seen before. Firms are being forced to counter offer. Maybe it's not as good as an upfront bonus, but at least you don't have to pick up and leave.” — HT
Write-Downs: $14.4 billion (through Q2 08)
Common Stock Performance, trailing 12 months: -35 percent (through 08/08)
Company Profit (Loss) By Unit (Second Quarter):
MS: $1.03 billion
MS Global Wealth Management: $989 million
Net Client Asset Flows: $13.3 billion
The Morgan Army: 8,350 reps
Avg. Advisor production: $810,000
Avg. Advisor AUM: $89 million
Perk Checklist:
Increased Expense Accounts: Yes
Sweetened Retirement Plans: Yes
Stock Option Re-pricing: No
Increased Payout: No
Wining And Dining Of Reps: Yes
SMITH BARNEY: STABILIZING THE SHIP
Smith Barney has been posting rather lackluster performance so far this year: Revenue was flat, and net income took a dive. Perhaps the most shocking stat of the second quarter: $11 billion worth of client money went out the door. But it was better than Citigroup's performance as a whole.
Is it panic time for Smith Barney reps? Considering all the noise surrounding Citi, perhaps the retail investor cash outflows are to be expected. Management feels your pain (remember: Management already re-priced your incentive stock options — well, many dollars ago), and is trying to sweeten the pot to convince advisors to stay. For example, at the beginning of the year, Smith Barney simplified its grid, which resulted in an increased payout that, the company says, “can add up to $13,200 in cash compensation per year for most FAs.”
For top producers, the tweaked compensation plan can result in substantially higher payouts. All in, with incentives, a $1.5 million-producer has the opportunity to improve his payout to about 58 percent of his production — that's up from a roughly 46-percent payout last year.
Of course, to achieve that payout level, an FA has to hit various performance marks, such as length of service, and participate fully in the firm's ICP deferred comp program, make voluntary contributions to the Capital Accumulation Program (the firm's discounted company share buying program) and the like. In terms of other perks, Citi finally got with the program last year and started offering eligible advisors expense accounts — or as they call them, Business Development Accounts (BDAs). The BDAs range from $1,000 to $15,000 for advisors with minimum production of $400,000 and $1.5-million, respectively.
Management also increased payout trails to retiring reps. The Career Monetization Plan pays top producers up to 200 percent of their last 12-months gross over five years. (It's similar to Morgan Stanley's package.)
As one top producing Smith Barney advisor puts it: “There is a lot of pressure on Citi to do something to help brokers because of the loss — a lot of them have significant holdings in Citi — and so they have to find a way to lock these guys up; me included.” This advisor says he and his peers get calls frequently from other firms offering them up to two-and-a-half times their gross production, which can amount to five times their income. “It's hard not to take that raft,” he says. — Christina Mucciolo
Write-Downs: $55.1 billion (through Q2 08)
Common Stock Performance, Trailing 12 Months: -58 percent (through 08/08)
Company Profit (Loss) By Unit (second quarter):
Citigroup: ($2.5 billion)
Smith Barney: $405 million
Net Client Asset Flows: ($11 billion) in Q2 08
The Smith Barney Army: 14,893
Avg. Advisor Production: $720,000
Avg. Advisor AUM: $78 million
Perk Checklist:
Increased Expense Accounts: Yes
Sweetened Retirement Plans: Yes
Stock Option Re-pricing: Yes
Increased Payout: Yes
Wining And Dining Of Reps: Yes
UBS: IT'S YOU, NOT US
In early July, management reportedly told UBS advisors that better pay would be forthcoming in fiscal 2009. Management wouldn't give any specifics, but rumor has it that advisors with $400,000 or more in trailing 12-months production will see an increase of 1 percent to 2 percent in their payout starting next year.
“We can't discuss the details at this point; we are in the process of revising some of the details of our retirement plan and the LOS [length-of-service] bonus would be one of the factors we're looking at,” says Matt Levitan, director of compensation and benefits at UBS. Currently, the LOS bonus offers advisors up to 4 percent (of gross production) and goes into the advisors' deferred compensation.
In addition to the LOS bonus, UBS plans on increasing company paid expense accounts. Currently top producers (about a $2 million gross) get $10,000 a year, but advisors can also elect to defer some of their own money for expenses on a pre-tax basis.
UBS also enhanced its retirement program earlier this year. For top advisors with several years in the business, UBS offers deals that go as high as 180 percent of the retiring rep's trailing 12-months production over 5 years. The program pays retiring advisors to stay at the firm for up to 24 months while their book of clients is handed off to another advisor, says Levitan. This represents a significant improvement to the old deal, in which a maximum of 70 percent of the trailing 12-months production was paid over four years.
Says one top producing UBS advisor, “There is just a feeling of, ‘Yes, this is a tough environment, and we'll do whatever we have to do to get you through it, whether that is the ability to go take clients out or travel more.’ I think they are pretty firmly behind you if you are doing something to increase your business.” — CM
Write-Downs: $44.2 billion (through Q2 08)
Common Stock Performance, Trailing 12 Months: -65 percent (through 08/08)
Company Profit (Loss) By Unit (Second Quarter):
UBS: (CHF 358 billion)
UBS Wealth Management: (CHF 741 million)
Net Client Asset Flows: (CHF 8 billion) in Q2 08
The UBS Army: 8,090
Avg. Advisor Production: $708,000
Avg. Advisor AUM: $86 million
Perk Checklist:
Increased Expense Accounts: Promised
Sweetened Retirement Plans: Yes
Stock Option Repricing: No
Increased Payout: Promised
Wining And Dining Of Reps: Yes
WACHOVIA SECURITIES: BANKING ON FULL INTEGRATION
After Wachovia announced it was buying A.G. Edwards for $6.8 billion in cash and stock last June, the industry was curious to see how Wachovia would reconcile its bank personality with that of a homegrown regional firm. More so, what efforts would Wachovia make to integrate its combined army of 14,600 financial advisors?
Retention packages were announced last June for A.G. Edwards reps; Wachovia advisors were offered a package, too. Since then, management has been talking about increasing payouts, but, as of yet, the new, combined compensation plan has not been announced. Management may be waiting until A.G. Edwards is “fully integrated” in February 2009.
In the meantime, in the second quarter (the first time they issued a combined earnings report), earnings at A.G. Edwards and Wachovia Securities (called the Capital Management Unit, which includes asset management, such as Evergreen mutual funds) were down. Like at Merrill and Smith Barney, Wachovia's retail brokerage unit suffered client capital flight, losing 10 percent in assets under management, or a net $17.6 billion in client assets.
Although only a select few know what the new combined compensation plan will look like, advisors are sanguine. Wachovia advisors say they saw an increase in their expense accounts recently. According to reps, expense accounts depend on production, with a million dollar producer receiving between $10,000 and $15,000 a year. The increase ranged from $500 to $2,000. Wachovia advisors said they appreciate the gesture. “During these tough market times and tough publicity times, it's a tangible way for management to tell us, ‘I know it's bad, I know it's tough, you might be spending more with clients, taking them to lunch or meals, and we're here behind you, we're standing behind you,” says one Wachovia rep. — CM
Write-Downs: $22.5 billion (through Q2 08)
Common Stock Performance, Trailing 12 Months: -61 percent (through 08/08)
Company Profit (Loss) By Unit (Second Quarter):
Wachovia: ($8.9 billion)
Wachovia Securities: $412 million
Net Client Asset Flows: ($17.6 billion)
Wachovia Securities Army: 14,600
Avg. Advisor Production: $630,000
Avg. Advisor AUM: $68 million
Perk Checklist:
Increased Expense Accounts: Yes
Sweetened Retirement Plans: Yes
Stock Option Repricing: No
Increased Payout: Talking about it
Wining And Dining Advisors: Yes
Asset Transfer
Most of the wirehouse wealth management divisions are giving up client assets.
Though the wealth management divisions of the Wall Street wirehouses are doing pretty well relative to other firm units, they've sustained their share of damage from the credit crisis and auction-rate securities blowout. Almost all of them have lost net client assets as a result — with the notable exception of Morgan Stanley. In fact, Morgan reeled in net new assets of $13.3 billion in the second quarter. Meanwhile, RIAs and independent b/ds seem to be benefiting from the loss of assets elsewhere on Wall Street — they're raking it in.
| Firm | Q2 Client Asset Outflows |
|---|---|
| Merrill Lynch | -$5 billion |
| Smith Barney | -$11 billion |
| UBS | -CHF 8 billion (U.S. only) |
| Wachovia | -$17.6 billion |
| Firm | Q2 Client Asset Inflows |
|---|---|
| Morgan Stanley | $13.3 billion |
| Schwab Institutional | $14.5 billion |
| Fidelity Institutional | $16.7 billion |
| Raymond James | $3 billion |
| Pershing Advisor Services | $2.7 billion |