In April 2009, Registered Rep. invited over 15,000 of its subscribers — including reps, branch managers, chairmen, CEOs, presidents and financial planners — to participate in an online survey about advisor compensation. There was a response rate of 1.7 percent, or 460 respondents.
Today there is a fairly common story heard along the boulevard of broken Wall Street dreams. It goes something like this. In late 2007, a 65-year-old wirehouse broker happily trotted into his office crowing about his plans to retire in 2008. This advisor was planning on retiring with a substantial nest egg — say, oh, about $5 million of that egg invested in his company's stock. Today? His nest egg is suddenly worth about a third of what it once was and monthly take home pay is down 30 percent. He's scrambling to rework his retirement plan — he'll work a few more years, possibly join another wirehouse just for the upfront bonus, even take a job or two on the side to make ends meet. After all, he's got a lifestyle to keep up and payments to make.
At least he's not alone. Too many brokers and advisors at the biggest national brokerage firms built retirement plans and lavish lifestyles — multiple house(s), car(s) boat(s) — that suddenly seemed unsustainable when the market tanked, says a former Merrill director. Not only were they generating a lot less revenue on assets, but their retirement money was all tied up in decimated company stock through deferred comp plans. “I know a lot of guys who used to proudly say they never sold a share of Merrill Lynch,” says the Merrill director. “They firmly believed it was the stock that was going to allow them to retire rich. The company line was ‘Our culture is 94 years old. We've never been bought, sold or merged.’”
Times have certainly changed. Some Wall Street firms with formerly stalwart brands have essentially become wards of the state. Many FAs have seen double-digit drops in compensation and retirement funds. Some have been forced to take desperate measures: One Morgan Stanley advisor, for example, recently took a part-time job loading trucks for a major freight company twice a week on the graveyard shift to pay for his family's health insurance, said one poster on Registered Rep.'s forums.
Andre Cappon, president of the CBM Group, a New York-based consulting firm specializing in the financial services industry says advisors he has spoken with complain they are having a tough time staying afloat. In general, customer accounts are down 20 to 25 percent in assets, Cappon estimates, for the average portfolio with half equities and half fixed-income. “Typically the brokerage firm and the advisor makes 60 to 70 basis points on the assets, so I would expect compensation to be down around 20 percent.”
Indeed, revenues from asset-based fees have been squeezed by the falling market. Overall, respondents to Registered Rep.'s annual compensation survey saw AUM decline by 12 percent in 2008. Wirehouse respondents experienced the largest drop, at 17 percent. That's not bad, actually, considering the S&P 500 lost 39 percent of its market cap in 2008, falling to $7.87 trillion. It declined another 2 percent to $7.70 trillion year-to-date through mid-May. This asset drop is reflected in quarterly performance at the firms. Merrill Lynch's Global Wealth Management U.S. unit saw net revenues decline 8.9 percent, to $12.8 billion in 2008. At Smith Barney, full year revenues from commissions and fees dropped 13 percent in 2008 to $2.83 million. Meanwhile, revenues per advisor at UBS' U.S. wealth management division fell to CHF735,000 in 2008 from CHF828,000 at the end of 2007. Even Charles Schwab, the best asset gatherer on the block, saw total client assets drop 21 percent to $1.14 trillion at year-end 2008.
Deferred comp is in even worse shape. A good gauge is the S&P Financials, since brokers generally have their deferred comp heavily invested in company stock. For 2008, the market cap of the S&P Financials was off 54 percent to $1.05 trillion, and year-to-date, it's down another 4 percent to $1.00 trillion. One top producing veteran AGE broker says he had a significant amount of stock at the time of the AGE/Wachovia merger in early fall of 2007, and today his options are “completely under water and my Wachovia stock is 1/30th of what it was. I won't starve, but it's a heck of a loss,” he says. It's pretty much the same story for everyone at the brokerages.
In fact, single stock exposure has become such a big problem for wirehouse financial advisors that some firms have changed their compensation plans this year to strip out language requiring that a certain proportion of deferred compensation be invested in company stock, says Andy Tasnady, of compensation consulting firm Tasnady Associates. For example, in its 2009 compensation plan, Merrill gave advisors more flexibility to reduce their equity participation in Bank of America stock to as low as zero percent, and increase their participation in a mutual fund program to 100 percent. The firm also eliminated the Financial Advisor Capital Accumulation Award Plans (FACAAP), Growth Award and Wealthbuilder, which offered advisors equity in new parent company BofA. The new plans offer advisors a broader choice of investments including mutual funds, alternative investments and structured products. And at the beginning of this year, Morgan Stanley tried to help top producing (500K plus) advisors with cash flow issues by offering upfront cash deducted from their deferred compensation programs.
To make up the difference in compensation, many wirehouse financial advisors have picked up and left — going across the street to rival wirehouses for fat recruiting packages. In fact, despite all the hoopla about breakaway brokers going independent, about 69 percent of the 5,600 wirehouse reps who switched b/ds between November and April stayed in the wirehouse channel, according to Discovery Database. (See our lead report, “Comfort Zone”) Others have left the business altogether. In April, more than 2,800 registered reps in the U.S. left the industry, according to the Financial Industry Regulatory Authority (FINRA). Year-to-date through May, departures totaled 11,600. This rivals highs seen in 2002, when a total of 11,500 brokers left Wall Street. In short, the pressure is high.
“I think there's no doubt that the personal finances of brokers have contributed to the heavy movement in the past several months,” says recruiter Danny Sarch. “For all the major firms, their stocks have gone to almost nothing. So if you're a certain age, you're crazy not to move,” he says. Sarch recalls that typical deals from 5 years ago offered 100 percent upfront in cash with all the growth incentives paid in stock that is now worth about half of what it was back then. “Guys plan on that. You get, say, 30-40,000 shares of Citigroup, you factor it into your net worth, maybe you even borrow against it,” says Sarch. “I don't think we can accurately understand how much of FAs' net worth has been crushed.”
RIAs: Reeling In Clients
At the RIA firms, the story looks a little bit different. Advisors at all firm types are working harder to pick up new clients in order to make up for the shortfall in assets, with just under half of respondents to our annual compensation survey (48 percent) saying the number of clients they serve increased in the past 12 months. But it's the advisors at RIAs who are having the most success: Some 68 percent of respondents from RIA firms saw the number of clients they work with increase in 2008, while 53 percent of RIA advisors said their clients added net new dollars in 2008, the highest of any group. “I think advisors' compensation is going down with the market, but it is at least being partially offset by the new business they're getting,” says Barnaby Grist, senior managing director of Schwab Advisor Services. By comparison, only 34 percent of wirehouse respondents saw the number of clients they work with increase, while 46 percent said their clients withdrew dollars on a net basis in 2008, the highest number of any group.
Take William Spiropoulos, president and CEO of CoreStates Capital Advisors, an RIA in Newtown, Pa. Since Spiropoulos launched his investment advisory practice in 2006, he says the firm has brought in about $100 million dollars in assets on a trailing 12 month basis, representing a roughly 40 percent increase. A former wirehouse advisor, Spiropoulos says 2008 was the hardest year in his 33-year career. But, like a “hungry skinny rabbit,” his firm took advantage of “flight capital” and “terrified money” from the wirehouses and banks to increase assets by about 30 percent. “At Schwab Institutional there was never an issue as to its solvency,” says Spiropoulos of his custodian. “That created a great comfort for the RIAs out there that were on the hunt for money, because you don't want to put money in the front door and watch it go out the back door.”
As in past years, RIAs also fared the best in total compensation in this year's survey. By firm type, respondents at independent RIA firms had the highest average compensation in 2008, at $320,000, including deferred compensation and bonuses. By comparison, the overall average was $172,826. Wirehouse advisors earned far less, with average compensation of $197,499. Advisors at independents, regionals and bank brokerages trailed behind them (See “RIAs on Top,'' below). Meanwhile, owner/principals at RIAs (including those affiliated with a b/d) had the highest average earnings of any job title or position, at $299,999. “If the two principals are the rainmakers who brought all of the dough and the clients, and rest of the capital, it goes without saying they're going to want to keep the lion's share,” says Spiropoulos.
RIAs are able to weather the economic storm a little better, in part, because many of them charge a minimum annual fee or flat fees for some projects, and these are not, obviously, hurt by falling asset levels. (On the other hand, such fees might discourage thriftier or panicked clients from using an advisor's services during a recession.) “I think the obvious trend for advisor compensation is being disconnected from products and assets. Over the last 20 years, you see this migration from commissions to fees, but it is not really a fee, it is a percentage of assets. I think a percentage of assets is more like a recurring commission than it really is a true fee,” says Bill Bachrach, president and CEO of financial services consultancy Bachrach & Associates.
On The Ropes
Even though RIAs have taken some clients and assets from advisors in other channels, wirehouse advisors still manage more assets on average at $60.5 million, according to our survey. Advisors at RIA firms manage an average of $47.5 million, by comparison, the survey shows. In part, that is because wirehouse firms have been making an effort to weed out smaller advisors and clients, say analysts.
“Wirehouse firms are trying to make a strategic move upmarket both in terms of the clients that they serve and the advisors that are there,” says Christopher Yeomans, a research analyst with FRC. “I would say there are two types of advisors at firms right now, ones that the firm wants to keep and those that the firm wants to get rid of, and the advisors that the firm wants to keep are receiving fairly generous retention bonuses or bonuses to move to another firm,” he continues.
Compensation grids are starting to reflect that bias more and more. While wirehouses have long sneered at producers with less than $500,000, these days management is actually acting on that thought, reducing compensation for advisors who generate under $300,000. In April, UBS announced plans to cut 2,000 employees in its wealth management division — many of them financial advisors with under $250,000 in trailing 12-months production. Meanwhile, in its 2009 compensation plan, Merrill cut payout rates by around half to between 20 and 25 percent for advisors who have been in the business for six years and produce $300,000 or less in annual revenue. Consultants say Smith Barney and Morgan Stanley could make similar moves this year, if they haven't already.
But that doesn't mean these guys won't survive the recession. Many of them will get better compensation deals at the independent and regional b/ds and tough it out. “Every time we've had a bad recession, you do whatever you can to survive and hang on — and I know guys hanging by their fingernails — you emerge stronger,” says the AGE broker. “Because you know what? A lot of do-it-yourself investors have been crushed too, so they'll be looking for advice.”