Advisor compensation will be an increasingly challenging issue for investment programs and advisors in the bank channel during the coming year, experts say.
There are a number of reasons for this. One is President Obama’s decision to use his executive authority to raise the salary level at which employees are exempted from eligibility for overtime payments when they work over 40 hours in a week.
That previous level was $24,000, and many bank-based advisors are paid that amount of their compensation as salary. But because, according to Fidelity Investments’ last survey of the industry, the compensation of advisors in the bank channel averages $225,000, this salary portion represents some 11% of total compensation -- with the rest coming from a grid. But when that salary component of compensation is increased to meet the new higher overtime exemption standard, salary will become a more significant part of many bank advisors’ compensation.
A second potentially challenging trend reported in a study by Kehrer Bielan Research & Consulting, shows that while overall annual compensation in the bank channel may have risen, as reported by Fidelity Investments latest survey (up 11% to $225,000 in 2014 from $200,000 in 2013), there is actually a widening divide between what top performing advisors earn and those whose AUM falls below the $600,000.
Peter Bielan, a principal and author of the study, says it shows that “over the past four years, top advisors have been getting more compensation and lower level advisors have been getting less.” This growing divide is due to special incentives, especially for top advisors, as well as changes in grids that give top performing advisors a bigger percentage of the fees they earn from client investments, and lower performing ones a decreased percentage. The study, he says, focused on larger banks with their own broker-dealer as well as some larger institutions that had a TPM running their investment programs. But he said that competitive pressures mean the same divergence in compensation is occurring in the investment programs at smaller banks.
Bielan also notes that there is, particularly at credit unions and some smaller community banks, a small but growing trend towards putting advisors on full salary, often with some annual performance bonus. It’s a trend that may well grow if the salary component of advisors earning compensation from a draw and grid suddenly gets doubled, or if, as anticipated, the U.S. Department of Labor approves some version of a new fiduciary standard for advisors.
Catherine Bonneau, CEO at Cetera Financial Institutions, agrees many banks are moving towards including a bigger salary component in compensation packages, and notes that a few of Cetera’s institutions have already switched advisors compensation to salary-and-performance-bonus-only.
On the widening divide in compensation between top performers and other advisors, Bielan says, “There’s no right way to compensate advisors.” Those running an investment program, he suggests, “need to know what they’re aiming for, and then to compensate advisors in a way that causes them to achieve that result. The difficulty is when you’re compensating in a way that produces results you don’t want. Then you run into all sorts of problems.”
He says there’s a clear problem if lower-performing advisors are getting squeezed on their compensation, even as bank program managers say it is getting increasingly difficult to hire new talent. “Bank profits are getting squeezed and when they pay their top advisors more, it means they have less to offer new advisors,” he says.