It’s no secret that large US-based wealth managers have been working to get more client assets into fee-based accounts as they strive to reduce client risk and secure a steadier revenue stream.
What may not be commonly known is that, in parallel, they have also been tinkering with advisor compensation schemes, adding conditions tied to the firm’s goals that employees must meet in order to receive a full paycheck.
Some of these changes are arguably beneficial for the clients, wealth firms and even the advisors themselves. However, the flip side of this fee-based push is that brokers end up defecting to independent players promising less restrictive and potentially more lucrative structures. The industry’s biggest players need to tread lightly if they don’t want to lose their top talent, according to industry experts.
‘The big trend risk is that people go to the independent models,’ says an executive at a large US brokerage who wishes to remain anonymous. ‘They have bigger, more flexible payouts.’
Meanwhile, on the other side of the Atlantic, Swiss private banks that have long been advocates of the fee-based model have had to tweak their approach, which traditionally featured a base salary and a bonus. They’re now looking to include incentives resembling the brokerage framework in order to hold onto their advisor talent.
‘If a banker is underpaid, they will put up with it for a couple of years, but then they will leave. That’s why many people have left the big banks, and they have left for more entrepreneurial models,’ says Lucas Hernandez, a Zurich-based consultant specializing in cross-border wealth management.
The indie threat
Independent wealth management players have proliferated in recent years, with US-based groups such as Insigneo Financial Group and Bolton Global Capital continuing to attract wirehouse talent to their ranks.
Their usual pitch focuses on the flexibility they afford advisors, who essentially operate as independent contractors. But there’s also a financial selling point: Independent broker-dealers tend to pay advisors about 80% of the revenue they generate, while a wirehouse or large brokerage might pay them around 40%.
‘If at a wirehouse I make 40% on my $100 million book and I leave for an independent, let’s say I can bring over $50 million,’ says the US broker executive. ‘Well, with $50 million at an 80% rate, I’m making the same amount.’
Moreover, an advisor who manages to move $50 million to the independent firm can still earn fees on the other half that remains with the previous brokerage by providing investment guidance on those assets plus additional services in exchange for an ongoing fee.
‘Within the advisory structure, firms are increasingly turning to more value-added services, such as aggregated or consolidated reporting, as part of their solution set to help deepen client relationships,’ says John Ward a managing director in charge of global client relationships at BNY Mellon’s Pershing.
Meanwhile, large companies are embedding requirements into advisor pay plans in a bid to make them fall in line with their long-term goals.
At Morgan Stanley, for example, since April 1 international advisors have to attract new relationships of at least $2 million per household – up from $500,000 – to receive 100% of their payout. New accounts with less than $2 million are compensated at a 20% rate and enjoy an initial six-month ‘grace period.’ The minimum was in line with the firm’s goal to focus on serving wealthier clients.
Many wealth managers also tie a part of their advisors’ pay to, for instance, the new money they attract or whether they’ve managed to steer clients into other products the company offers, such as lending and banking.
These changes could lead brokers either to align themselves with the company’s strategic plans or to head for the door. When Morgan Stanley’s new threshold kicked in, industry sources say that while it might help the company to achieve its objective, it could also encourage smaller advisors who can’t meet it to think about joining independent firms.
‘If we put in more conditions, the financial advisors can get sick of that,’ says the US brokerage executive.
Pershing’s Ward says that he has seen the trend of advisors and investors adopting a fee-based model accelerate over the past 12 to 18 months.
Major brokerages such as UBS and Citi offer a range of product bundles with asset-based charges that cover the gamut from portfolios run by third-party managers to non-discretionary programs in which the advisor provides guidance but the client makes the final investment decision.
At UBS, the fees for these products range from 0.75% to 2.50%, with some carrying additional costs to compensate investment managers or model providers, according to regulatory documents.
‘The smart advisor would go fee-based for many different reasons. It’s better for the client, less time consuming and less risky because you’re able to diversify your clients with a wide range of products and services,’ says one person familiar with UBS’s program.
However, this model has also raised questions about whether advisor pay might suffer compared with what they may have earned under a commission-based structure. So it’s up to the wealth management firms to sell their advisors on why they should continue to make the switch.
‘First of all, this is a different world and a different regulatory environment,’ the US broker-dealer executive says. ‘Clients have a lot more knowledge of what we charge them than they did before. In this environment, you’re not going to be able to charge the same.
‘Second, regulators are monitoring much more closely your movements in terms of buying and selling. It’s better for you to put your money in managed accounts and that way you can focus on growing your assets and bringing in new relationships.’
The view from Switzerland
As US-based firms seek to move their advisors away from the commission-based model, many Swiss wealth managers have been adopting incentives for their advisors that look more like the American ‘eat what you kill model,’ according to Hernandez, whose consultancy focuses on European firms serving Latin America.
‘It’s ironic that here in Switzerland they’re moving toward being a bit more entrepreneurial in the compensation, even if the service to clients is fee-based,’ he says.
Traditionally, Swiss private banks have paid their advisors a base salary and a discretionary bonus doled out according to seniority and other rather subjective factors. This had to change after a global wave of transparency engulfed the industry, stripping Swiss banks of their secrecy guarantee, one of their key selling points.
‘For many decades in Switzerland, the business was receptive by inertia – the clients would come on their own. Therefore, the banker’s profile wasn’t necessarily that of an entrepreneur used to “eating what they killed.” The profile of the Swiss banker, and therefore the compensation model, was far more traditional.’
Subsequently, many banks were forced to add incentives to their pay schemes to attract and retain talent. It is understood that Mirabaud, Julius Baer and Lombard Odier, for example, reward some of their private bankers based on the net new money they attract and their return on assets, among other factors.
Hernandez says that this model can prove competitive and that often the compensation of Swiss private bankers was on par with that of US-based brokers. However, their American counterparts still hold an advantage.
‘Latin America’s DNA is more broker-oriented for the simple reason that American firms were previously more present in the region,’ he says. ‘I think Swiss banks’ weak spot is not necessarily the compensation model...the problem is that Latin American clients like the US and they’re used to it, so there’s a gravitational pull toward it,’ Hernandez adds.