Heard on the Street - Wall Street Still Spends Big to Court Top Stockbrokers
By Randall Smith, Staff Reporter of The Wall Street Journal
July 14, 1999
The Wall Street Journal
Page C1
(Copyright ©1999, Dow Jones & Company, Inc.)
Wall Street can be a funny place. At a time when low-cost online stock trading is threatening to make full-service stockbrokers obsolete, who is the Street throwing money at?
Stockbrokers, of course.
In fact, top producers who cater to the wealthiest clients are in greater demand than ever.
Wall Street securities firms are offering upfront hiring packages of more than 100% of top brokers’ commissions and fees for the past 12 months in order to persuade the brokers to change firms, according to several industry executives and recruiters. This is even as the Street is scrambling to keep profits high; brokerage-company stocks as a group are off 22% from their April highs.
Michael J. King, a New York recruiter who specializes in placing brokers, says the one-time recruitment packages are “higher than they’ve ever been. The brokerage firms have gotten into a bidding war for top producers that has driven the bounty unbelievably high.”
Houston recruiter Rick Peterson adds: “This has been a sustained, two- to three-year ever-escalating battle. It’s been joined by every major [brokerage] firm in the country, and a few of the regionals. It’s sort of a feeding frenzy.”
After easing in the wake of the 1987 stock-market crash, broker earnings have climbed nearly every year, and now average roughly $175,000 a broker, according to analysts. That is just the average; top-level brokers can get paid as much as baseball players. Once-rare “million-dollar brokers,” a reference to yearly commissions, are all over the Street.
Behind the bidding war is a long-term climb in the stock market that has attracted an increasing percentage of U.S. households’ net worth to Wall Street. The result is a scramble to capture those investor dollars by throwing money at the brokers who are good at just that. “It’s worse than it has ever been; it’s a function of the seven-year bull market,” says Robert Yevich, president of the Tucker Anthony unit of Freedom Securities Corp.
But as major Wall Street firms try to increase assets under management to boost their fee income, they must pay more to recruit brokers who are “handcuffed” to other firms by lucrative stock options and other forms of deferred pay.
Some industry executives decry the trend, even as their firms are drawn into the bidding. John “Launny” Steffens, who leads the army of 15,000 U.S. brokers at Merrill Lynch & Co., said such offers generally “are probably higher today than they’ve ever been.” Noting that Merrill isn’t among those making the biggest offers, he added, “I don’t understand the economics of it.”
Some regulators, most notably Securities and Exchange Commission Chairman Arthur Levitt, have criticized upfront-pay packages, saying they may motivate brokers to encourage transactions that aren’t in clients’ best interests.
In an April speech, Mr. Levitt said the National Association of Securities Dealers, the self-regulatory group for brokers, is considering a rule that would “mandate disclosure when brokers ask their customers to transfer their accounts to a firm that has paid the broker to switch.”
Mr. Levitt explained that brokers “who are paid to switch firms may feel pressure to trade more after the switch. So it is imperative that customers know the incentives that were offered to their brokers.”
The lucrative packages are typically structured to include loans forgivable over periods of four to six years; that way, the recipients receive cash up front, while postponing income taxes until the time each segment of the loans is forgiven. Similarly, the securities firms can defer reporting such expenses until the years in which the loans are forgiven.
The packages may also include stock options, increased payouts on commissions, and back-end bonuses tied to performance, all of which may be counted to arrive at the total percentage of the package. Mr. King, the New York recruiter, said the packages hit 100% only in the past year, up from “50% to 60% tops” previously; others report they reach 120% of trailing 12-month commissions.
Some industry experts say the 100% barrier was first breached a few years ago by a few regional firms. Among them: Wheat First Butcher Singer Inc., both before and after it agreed to be acquired by First Union Corp. in August 1997.
The resulting growth in the number of brokers has enabled First Union, which has since announced plans to acquire Everen Capital Corp., to claim the combined firms’ army of brokers would rank No. 6 in the U.S. A First Union spokeswoman wouldn’t comment on compensation specifics.
The intensity of the pressure to show growth in client assets was made clear when Merrill reported its first-quarter earnings in April. At that time, some analysts noted the net intake of client cash of $9 billion had fallen from the fourthquarter level, and Merrill’s stock price declined that day.
One explanation Merrill advanced for the drop in investor cash: the departure of two top brokers in Chicago with more than $2 billion in client assets, who were recruited by Morgan Stanley Dean Witter & Co. A spokesman for Morgan Stanley, which aims to boost its number of brokers by 10% annually, declined to comment on the brokers’ pay. (Yesterday, Merrill said its cash intake rebounded to top $30 billion in the second quarter, reassuring analysts.)
Although PaineWebber Group Inc., Prudential Insurance Co. of America’s Prudential Securities and Morgan Stanley are all said to be bidding aggressively for talent, industry experts say Merrill has joined the fray only more recently, and that the Salomon Smith Barney unit of Citigroup Inc. trails the other majors in making top-dollar bids. Not only is Salomon Smith Barney known for growing via acquisition, but its longtime top executive, Sanford Weill, is also known for keeping a rein on expenses.
The bidding wars have been enlivened by the increasing resort to temporary restraining orders obtained by securities firms jilted by the departing brokers. The orders typically bar the brokers from contacting their clients to try to persuade them to shift accounts to the new firms.
Lifting the restraining orders, recruiters say, can become part of a negotiated settlement that may provide the jilted firm itself with compensation of as much as one-fifth the size of the package. Some recruiters say Merrill, which generally requires its brokers to sign a noncompete contract, pioneered the use of such restraining orders.
One factor raising the ante is that the stock prices of most public securities firms have been driven up by the bull market, boosting the value of “golden handcuffs” most firms use to try to retain employees. The handcuffs usually consist of deferred stock or options that can’t be cashed in unless the employees stay for several years. As the rising stock price boosts the handcuffs’ value, brokers who depart must sacrifice a pile of valuable stock or options they could get access to later by sticking around. “So firms started to offer stock for stock and enhanced payouts just to make them whole on what they were going to be leaving behind,” said Mr. Peterson, the Houston recruiter.
Mr. King says such recruiting efforts generally are focused on top brokers whose clients generate more than $1 million in commissions or fees annually, who have few disciplinary problems, and whose commissions and fees don’t total more than 2% of their clients’ assets annually.
Another factor driving the competition, Mr. Peterson added, is that Wall Street training programs have suffered from a tight labor market and general economic prosperity. Add the growing threat of online trading to the future of younger brokers starting out in the business, he said, and “training programs have suffered in the past three to four years.”
Mr. Peterson adds: “Most firms I talk to tell me the quality of their trainees has suffered somewhat, and as a result the retention rate has suffered; turnover is horrible, many are not making it. It makes the recruitment of somebody else’s broker financially viable.”
Some regional brokerage firms are reluctant to join the bidding wars. “The levels are ridiculous in my mind,” says Thomas McDonald, head of the private client group at the McDonald Investments unit of KeyCorp in Cleveland. “It’s absolutely insane.”