Repricing Brokerage
By Tracy Herman, Registered Representative
February 2000
The economics of the brokerage business changed last year. Most of the major firms repriced their fee offerings, and have tweaked compensation packages to reward asset gathering and fee business. While pricing pressure is intense, recruiting packages have never been higher.
Gathering assets and delivering advice for a fee are what count, and firms are rewarding brokers accordingly. Prudential Securities is a good case in point, instituting this year a higher payout for fee-based business. Last year, Merrill Lynch and PaineWebber both changed their compensation systems to better reward asset gathering and fee business. Meanwhile, fee pricing and commission rates are declining, while recruiting deals are exploding.
“Firms are customizing the grid,” says Michael Herman, a consultant with New York-based Sibson & Co., a compensation consulting firm. “They’re asking, ‘Who can we pay well, and who can we cut?’” Plus, firms are shifting to longer-term deferred comp plans. “They’re all trying to reduce the cost of sales because of the pressure that’s been put on commissions,” Herman says.
Pru Changes Its Pay
Part of the squeeze on commissions is from Internet trading firms. Hence a major industry shift toward advice for a fee. In line with that philosophy, Prudential trimmed its grid this year for transaction business by one point and raised the payout for fee business by five percentage points.
Prudential brokers’ reactions to the grid changes have been mixed, depending on what type of business they do. An East Coast Prudential rep who is fee-focused feels positive: “I calculated it out, and I’ll be getting about $8,000 more.” A transaction-oriented broker in the Southeast laments: “It sucks. Dropping 1% comes to 2.5% of my money. In exchange, there are certain products they want us to push–Pru Advisor, managed accounts, Pru Choice, Target.”
The firm also introduced a new deferred comp plan, MasterShare. Reps can set aside up to 25% of pretax earnings in a Prudential index fund that tracks the S&P 500 at a 25% discount to market value. They get a 35% discount for contributing at least 10% of their income this year. It vests after three years.
But like Salomon Smith Barney’s Capital Accumulation Plan (CAP), reps lose their contributions when they leave the firm or are fired. That’s why some Prudential brokers are jokingly calling the new deal “Master Scare” and “Master Snare.” “It’s strictly a golden handcuff,” says the East Coast rep at the firm. “They’re looking to keep producers who are making money.”
A West Coast Prudential rep adds: “I think some guys feel it’s a Trojan Horse–beware of the Greeks. I think it’s nice. I’m happy they put it in. It comes close to leveling the playing field” with other firms.
Merrill’s Price Cut
Merrill Lynch’s “priority/premier household” compensation plan went into effect in January 1999.
In July 1999, the firm made waves by introducing its Unlimited Advantage program, which cut its pricing on fee accounts to 1%–from 1.5% or more–while also offering unlimited trading.
To ease the transition, the firm gave brokers with the old fee accounts a gap payment. The transition pay was paid out in cash during the third and fourth quarters of 1999, and will continue through the first half of 2001 in the form of half cash, half deferred compensation.
Merrill also eliminated its discount sharing policy, which penalized brokers for discounting. “They have made it more flexible to do business,” says one rep.
The firm jumped into its own discount business in December with the launch of Merrill Lynch Direct, offering customers online trades for $29.95. “If we were losing an account to Schwab, at least we have a vehicle to capture it now,” says one rep.
But the overall pace of change has been unsettling. The price cuts and the discount operation have created some unhappiness at Merrill, some recruiters say.
MSDW’s New Choice
Morgan Stanley Dean Witter introduced its new fee pricing in October 1999 via a revamped “service platform” called ichoice. It allows clients to choose from three alternatives: traditional full service, a fee-based Choice account with unlimited transactions and the advice of a broker, or a self-directed online account with $29.95 trades through MSDW Online.
Brokers have some latitude in setting fees.
A West Coast MSDW rep says, “Here they give you flexibility to price the client where you were pricing them before.” Fees start at 2.25% for equities, and 1% for fixed income and funds. This base rate “is the minimum you can charge, but you get to decide how to charge the client.”
Unlike Merrill reps, MSDW brokers can maintain their traditional fee pricing by charging more.
Brokers at the firm say they’ve been unaffected by MSDW Online. Clients who pick some of their own stocks are doing it in their Choice accounts because they pay nothing for trades.
A Year for Investors
Meanwhile, other firms made minimal or no changes, and commission rates overall have remained in check.
Salomon Smith Barney’s grid will remain in place, but recognition club levels are being raised for 2000. Director’s Council requirements are now $1.35 million up from $1.25 million; Chairman’s Council went to $1 million from $950,000; and President’s Council members need to do $675,000, up from $600,000. Plus, a new category called Century Club has been added at the $500,000 production level.
When First Union acquired Everen Securities in April 1999, it adopted Everen’s compensation structure. Brokers have been told it will remain in effect until January 2001.
Regarding the industry in general, a 1998 SIA Survey found that more than a third of full-service firms were discounting more in 1998 than in 1997, while commission rates held steady.
Last year saw even more pricing pressure. Overall, “It was a year for the investor versus a year for the broker,” says Jim Trice, a North Hollywood, Calif., recruiter.
BATTLE FOR BROKERS
Brokerage firms are facing stiff competition and a tight job market, so the sky’s the limit when it come to recruiting reps.
With SEC Chairman Arthur Levitt Jr. publicly criticizing recruiting deals, some thought incentives would die. Hardly. They’re bigger than ever.
“A state-of-the-art deal is 100%” of yearly production, says Danny Sarch, president of Leitner Sarch Consultants, a White Plains, N.Y., recruiter.
Patti Rowlette, who heads Rowlette Executive Search in Dublin, Ohio, says $1 million or larger producers might get 125% of trailing 12 months’ production from a national firm or wirehouse. “A $750,000 producer might get 75%, and at the back end 5% or 10%,” she says.
A West Coast attorney who’s handled several raiding cases within the past year says he’s seen bonuses of up to 150%.
In 1995, when the Tully committee recommended the elimination of upfront bonuses, “we thought deals would go away,” Rowlette recalls. “Now, deals are almost getting out of hand. Nobody wants to be the first one to eliminate upfront bonuses.”
Michael Herman, a consultant with New York-based Sibson & Co., a compensation consulting firm, says the deals go beyond forgivable loans to include signing bonuses, stock options, equity plans and deferred compensation contributions. Sarch confirms the trend, noting that deals offer stock, back-end incentives based on assets and upfront money.
“The typical deal is 60% cash, 10% stock with additional bonuses after 14 months if they brought in ‘as advertised assets,’” Sarch says.
Following in the footsteps of wirehouses, regional brokerage firms and independents are offering better deals (although still smaller than wirehouses), with similar structures of upfront and back-end money, partly based on assets, Rowlette says. And the smaller firms are leaving payouts alone, she adds.
One example is Profit Formula, First Union’s quasi-independent program for $1 million or higher producers. They get a 75% payout, Rowlette says. “They can get as much as 60% of trailing 12 months [gross] in upfront money.”
Mitch Vigeveno, a recruiter who heads Turning Point in Clearwater, Fla., says smaller firms will do deals of 5% to 20% of previous 12 month’s gross. “On the independent side, 20% is the highest.” Only a few independents, such as National Planning Corp. and SunAmerica, offer incentives. “Deals generally don’t get interesting unless there’s $500,000 in commission,” he says.
Why the growing dollars? For one thing, the market has been hot, of course. Rick Peterson, a Houston recruiter, points to other factors. “Handcuffs are huge, and firms have to address that to get brokers to move,” he says. “And [while] everybody is recruiting now, training programs have not been as rewarding as in previous years. It’s the tightest job market in history, and firms are not getting the cream of the crop anymore.”