When Hilliard Lyons introduced its current team-based award program in its compensation program five years ago, it led to what Executive Vice President Darryl Metzger now calls an "A-HA" moment for the firm.
That's because in four years, the share of the firm's financial consultant force working on teams has surged from 30% to its current total at 70%, and could continue to grow, Metzger says.
Hilliard's team-based award is just one part of its compensation plan, which also rewards members of the firm's financial consultant force who practice individually. But the strength and growth of its team program speaks to an industry-wide emphasis on teams that has continued to surface on the compensation plans for wealth management firms this year. On Wall Street magazine has once again gathered the new compensation plans for the large wirehouse and regional firms to see what financial advisors can expect from those companies in 2012. And, for the first time, we have also included a new chart from a smaller regional firm, Southwest Securities.
The results may surprise you. With the help of our outside compensation expert Andy Tasnady, we found out which firms came out on top at the $1 million, $600,000, $400,000 and $200,000 production levels.
Of the wirehouse firms, UBS Financial Services held on to the top spot at the $1 million mark, and rose to number one this year at the $600,000 level. Bank of America Merrill Lynch took the top spot at the $400,000 level, while Wells Fargo came in at number one at $200,000.
Of the regional firms, Raymond James & Associates also held on to its top spot at the $1 million mark. Janney Montgomery Scott took number one at the $600,000 level. Stifel Nicolaus and Wedbush Securities held on to their top spots from last year at $400,000 and $200,000 respectively.
But the compensation story this year is so much more than the rankings or the team-based awards. It's also the tweaks that firms make to try to get their financial advisors to reach higher and higher for assets. It's the acquisition of Morgan Keegan that will make the appearance of that firm's compensation grid in our rankings this year its last. And it's all of those changes that will help determine financial advisor loyalty.
It Takes a Team
Hilliard Lyons' team-based plan, called Preferred Partnership, was inspired five years ago when the firm looked what smaller, more nimble wealth management firms were offering, according to Metzger, who also serves as director of private client group administration at the firm.
Today, Louisville, Ky.-based Hilliard's team plan allows for the teams to combine the production from all of their partners and tell the firm each year how they want to divide it.
"Basically, it allows them to go through our financial consultant compensation plan as one unit. Even though there might be four or five people on that, they can make more money," Metzger says. "They can make more money being in the preferred partners versus a stand-alone advisor."
Hilliard's teams can range in size from two financial consultants working with one client service associate to seven financial consultants working with three client service associates. The bigger team would likely be in a growing area for the firm like the Carolinas, Metzger says. Hilliard currently operates predominantly out of Kentucky, Indiana, Ohio and Tennessee.
The team structure allows them to provide different areas of expertise for clients, much like seeking the consultation of a general health practitioner and specialist doctors, Metzger says. This structure ultimately allows for a financial consultant who enjoyed daily portfolio analysis and analytical details to pair up with another financial consultant who leans more toward broad wealth planning and relationship management.
"It's people with different skill sets and different things that they enjoy most about the practice partnering with other team members that leads to greater client satisfaction and really greater advisor satisfaction, as well as overall success for the firm," says Jaleigh White, who joined Hilliard as executive vice president and director of high net worth strategies last July. "It's the case where one plus one does equal three."
The team structure is also aimed at taking the risk off of adding new members. Someone with a very unique set of expertise, but not a lot of clients, can be folded into a team in their first year at one production level. In subsequent years, after they have proven themselves, their take-home pay can go up.
But even as Hilliard has ramped up its emphasis on a team-based approach, sometimes an individual practice still makes the most sense, Metzger says. One of Hilliard's individual financial consultants is a municipal bond expert with 35 years of experience in the industry. His practice, as a result, is more of a niche and more suited to an individual, according to Metzger. "We absolutely value the individual practitioners, financial consultants, but a lot of those individuals have a very niche and narrow practice," Metzger says.
New Team Awards Debut
Merrill Lynch's new compensation plan made news this year when the firm raised the bar for compensation on new client accounts from $100,000 to $250,000. Financial advisors with 80% of their clients at $250,000 and above will still be able to collect 20% on the accounts below $250,000. Once the accounts grow to the $250,000 threshold, all financial advisors can collect on those accounts. Also, any accounts that fall below the $250,000 mark will still count toward an advisor's overall production.
One move that Merrill Lynch also made in this year's compensation plan that garnered less attention was the debut of a team grid award. To qualify, financial advisors must be a part of a registered team sharing at least 50% of their production.
Among the other requirements that Merrill Lynch outlined for the new team grid award include reaching at least two of out of three achievements: 80% book affluence, book capacity of less than 150 households per financial advisor or 50% of fee-based assets as a percentage of total investable assets.
Merrill Lynch teams who reach all the team award requirements will be paid at the highest producing team member's cash grid level.
RBC Wealth Management also launched a new program, called Signature Team Compensation, this year. Now teams who meet certain requirements can all get paid at the base commission rate of the highest producing team member.
By adding the team awards, Merrill and RBC join the ranks of firms like UBS and Morgan Stanley Smith Barney, which already have team compensation plans in place.
"The reality is that providing advice has reached a complexity where team-based working is required," Alois Pirker, research director at Boston-based financial services research firm Aite Group, says. "You need specialists that can do rep as [portfolio manager], or can do financial planning. If you're not a team, it is becoming tougher to be productive.
Morgan Stanley Smith Barney has found that its number of joint production numbers is now 30% more than in 2009 when the firm was first combined, according to Andy Saperstein, head of U.S. wealth management at the firm. Part of the appeal for Morgan Stanley's advisors is that everyone on a team gets compensated at the grid rate of the highest producer on that team.
"The primary motivation for someone going on a team, in my opinion, is always to serve clients better," Saperstein says. "A comp incentive with teams is more of a secondary benefit."
Morgan Stanley kept that team award the same this year as it changed other parts of its compensation plan. Morgan Stanley reduced its revenue bonus program by 1% for all levels, in an effort to reduce the emphasis on that kind of deferred compensation in favor of growth awards that offer more current compensation, according to Saperstein.
Another change at Morgan Stanley includes raising the bar for its annual gross revenue range for financial advisors registered with the firm for nine or more years. That range was moved to up to $300,000 from $250,000. "We were below the industry standard where we were, and we basically just brought it up," Saperstein says. "That was just an adjustment, which I'm sure everybody assumed we were going to make."
Morgan Stanley financial advisors falling below that $300,000 level will have more than a year to grow their business to that level. Once they do, that will count retroactively for the year. Alternatively, those financial advisors in that so-called penalty box can join a team, which would make the rule no longer applicable to them.
Through its compensation plan, Morgan Stanley emphasizes size, length of service and growth. But the firm also wants to differentiate itself by letting its financial advisors decide how they will achieve those goals.
"We've done less than perhaps some of our competitors in telling advisors they have to achieve their growth or their size through particular practice models or particular types of behaviors," says David Lessing, chief operating officer of U.S. wealth management for Morgan Stanley Smith Barney. "We describe it as more of an entrepreneurial compensation plan overall than some of our competitors."
Standing Out From the Competition
Other wealth management firms are also striving for their compensation grids to also communicate their values and culture to financial advisors.
St. Louis-based Wells Fargo Advisors is one of those firms, which strives to make small changes from year to year and keep the compensation plan simple to understand, executives say. Among its changes this year, Wells Fargo raised its lowest monthly hurdle to $11,000 per month, up from $10,000 last year, at a 22% grid rate.
"We prefer to make small tweaks each year to reflect the cost of doing business," Wells Fargo Private Client Group President Jim Hays says. "Going from the hurdle from $10,000 to $11,000 really just reflects the increased costs of doing business, as well as the fact that we've had a nice productivity growth on behalf of our advisors."
Wells Fargo is seeking to highlight its deferred compensation this year, according to Erik Karanik, director of branch incentives and cost management. That includes an increased maximum potential for all financial advisors above a certain production level. It also means having a menu-like system to reward successful outcomes, whether it come from following the firm's best practices or achieving growth independently.
"It gives [financial advisors] more ways to earn additional compensation, so they can earn them via best practices or they can earn them via growth or some combination of the two," Hays says. Ultimately, Wells Fargo aims to have those plans speak to the firm's culture that embraces all kinds of practices and client sizes.
"We really take a view that the FA owns that client relationship, and they should be rewarded the same regardless of the size of the client," Karanik says.
Raymond James & Associates, which is based in St. Petersburg, Fla., has left its compensation plan mostly the same this year. But bigger compensation changes could loom for the 1,000-plus Morgan Keegan financial advisors that the firm could tuck into its force later this year. [Editor's Note: Morgan Keegan's pay grid will remain unchanged this year and its advisors who have moved to Raymond James will be subject to the 2011 Morgan Keegan grid, which we have reprinted from last year's issue.]
Raymond James's $930 million acquisition deal for Morgan Keegan is still pending regulatory approval and targeted to close at the end of March. Before those advisors are fully integrated into Raymond James's systems and technology roughly 12 months from now, they will continue to be compensated based on Morgan Keegan's compensation plan, according to Raymond James & Associates President Tash Elwyn.
One change in Raymond James's 2012 compensation, effective March 1, will include no payout on equity, option or bond trades with a commission under $75. The firm will also have a 25% payout on equity, option or bond trades from $75 to $100. "We're raising the minimum commission on equity," Elwyn says of the change. "This brings us more in line, from a commission standpoint, with where the rest of The Street is on the minimum side."
Other features, like the recognition club awards for financial advisors ranking in the top 40% of Raymond James's advisor population and encouragement for earning professional designations with contingency points, remain in place.
"When you acknowledge and believe that advisors own the book, consistency of culture and consistency of overall compensation is an important part of the overall picture," Elwyn says.
One firm that On Wall Street continues to put in a category all its own for our annual compensation ranking is Edward Jones. Though based in St. Louis, the firm's financial advisors operate through its unique branch structure that typically includes one financial advisor working with one branch administrator. Those branches represent the firm's true profit center, according to firm spokesman John Boul, as Edward Jones does not trade on its own accounts.
Consequently, Edward Jones's branch structure also affects the structure of its compensation plans. Each branch has an individual profit and loss statement. Profitable branches earn a bonus. How large that bonus is also based on the firm's profitability.
Another aspect of Edward Jones's plan that makes it unique is profit sharing deferred compensation plan that vests immediately, according to Phil Owen, principal of finance at Edward Jones. Every two to three years, the firm also allows profitable businesses the opportunity to become limited partners in the firm.
And the individual structure does not mean there is no opportunity for teamwork at Edward Jones when the need arises. New financial advisors joining the firm can join an office with a more experienced advisor for 12 to 18 months following their 12-month stint in the home office. The senior financial advisor will share some assets or clients to help them get started, and will be rewarded by the firm with some compensation for doing that.
"We're always in this together to help the new person," Owen says. "As soon as we can help those new people be successful and profitable, it helps the firm overall, which drives up our bonus levels, which then provides more bonus to everyone. We're all in this together."
That's how Hilliard and the other firms see the future of teams in wealth management. Even when advisors move between firms, now, more often than not, they move in small groups of people who have been partners for several years.
In fact, teams have been part of the wealth management industry for quite some time now—and for good reason. Consider this: In 2008, when Boston-based research firm Cerulli Associates and the Financial Planning Association surveyed 1,000 advisors across various channels, the two organizations found that 80% of those polled cited improved efficiency as one of the advantages to being on a team. Another 52% pointed to increased assets under management and 51.3% said access to higher-net-worth clients were the big benefits to being part of a team.
Financial advisors, Hilliard's Jaleigh White says, "are finding value in partnering and developing teams, where different people have different areas of specialty." She adds that the firm's management has been hearing from its advisor force that the additional "complexity to the services and the comprehensive nature of what we're providing to clients" requires a variety of wealth management skills. "It takes people with a lot of different points of view, specializations," she says. And, she notes, "as advisors mature in their careers, they'll find that there's certain parts of the practice that they really gravitate to and want to spend more of their time with."
That message is getting through to the firms loud and clear and increasingly, it is being reflected in their evolving compensation structures.
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