Wirehouses Slash Deals Up To 17% To Comply With Fiduciary Standard

by: Mark Elzweig

Summary

Financial advisors need to adjust to a new reality, which is still velvet-lined.

Regulators appear to fear back-end bonuses would encourage bad behavior.

Wirehouses aren't unhappy about paying a little less to recruit advisors.

The ho-ho-ho's of the holiday season are fading fast in this new year as financial advisors awake to a new reality: Recruiting deals have gone on a fiduciary standard-inspired diet.

And guess what, the wirehouse execs aren't shedding any tears. More on that, in a moment.

At issue: back-end bonuses.

The Department of Labor appears to be concerned that advisors will push clients into inappropriate investments in retirement accounts so they can hit asset and fee targets and collect big bonuses down the road. I wonder if the regulators were thinking about the bad old days when brokerages like Dean Witter Reynolds pushed mediocre or even inappropriate proprietary products to clients so they could win first place in quarterly sales contests - trip to Barbados, anyone?

The result: Wirehouse packages for top producers have been dealt a serious haircut of about 17%, bringing down recruiting packages to 250% of 12-months' production from 300%.

Firms are still offering advisors up to 150% upfront, but back-end bonuses have been reduced as a result of concerns about improperly crafted incentives. If firms can't set targets for gross production or assets, that effectively limits how much firms can offer in bonuses. There's only so much that you can pay an advisor for simply showing up.

Major firms who were initially shocked by the DoL's pronouncement secretly welcomed the opportunity to back-pedal on their recruiting packages. The profitability challenges of the low-return environment and skyrocketing compliance and technology costs have been squeezing earnings. The DoL ruling gives them a chance to ease up on the race to spend more than Midas on top producers.

While it's possible that competitive pressures may push deals higher for stellar performers, this is unlikely to occur anytime soon. Firms privately say that the deals of yore are not sustainable and they aren't interested in returning to those levels. Rather, they are more likely to try and think of creative ways to craft different kinds of incentives that will make financial advisors feel special without breaking the bank.

And, let's face it, a 250% package is not exactly chicken feed. It only seems a little skinny because expectations have been set high - and randomly at that. This will have to change.

Overall, regional and independent firms are less affected by the DoL kibosh on back-end bonuses for retirement accounts because their deals typically include mostly upfront incentives. So this could translate into a moderately better competitive edge for them in the race for talent.

Upfront Total Package Contract Length
Wirehouses 100%-150% 250% 9 years
High-End Boutiques 100%-140% 240% 9 years
Regional Firms 100%-150% 100%-250% 9 years
Independent Firms

10%-60%

100%, special situations

3 to 8 years

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.