Banks are braving the waters of non-traditional advisor compensation plans even as they risk losing their top performers.

In its annual study of pay plans for bank advisors, research firm Kehrer Bielan Research & Consulting found that three of the 30 large banks surveyed had implemented plans that veer from the traditional practice of paying advisors on commission based on their production.

While banks have always talked about paying advisors differently, none have acted on it until now, says Peter Bielan, a principal of Kehrer Bielan. Pressure to control costs amid growing competition and concern over anticipated regulatory changes are driving financial institutions to consider other advisor compensation options, he says.

In addition, banks are eager to reward advisors in line with specific goals they would like to achieve, like boosting advisory business and financial planning. Many institutions also want to align advisor pay with that of other bank personnel, Bielan says.

A Lot of Talk

Despite their desire for change, few have had the temerity to implement alternative plans, with less than 5% of advisors in banks and credit unions under non-traditional comp arrangements. But that may change, according to Bielan.

"It hasn't taken anything by storm yet, but there's a lot of talk," says Bielan. 

The three plans analyzed in the study were distinct, with each focusing on different objectives.  One plan – easily recognizable as HSBC's—pays advisors a salary and a discretionary bonus based on bank-driven performance metrics like service levels and client satisfaction.

This plan seeks to reward all employees the same, regardless of role. It's a good plan if the institution wants to "make investment folks look more like bank employees," says Bielan.  "If that's the objective, then that's the right plan."

Push for Advisory Assets

Another plan aims instead to drive advisory business by paying advisors on a grid measured by advisory assets. Under this comp arrangement, the payout grid for all business is determined by how much advisors have in advisory assets. Those with more advisory assets are paid at a higher grid. For example, if an advisor has $5 million in advisory assets, he or she might get 30% on all business.  If the advisor had $7.5 million, he or she might get 40%.

"It's a very innovative way to have advisors focus on advisory business because it truly walks the walk," says Bielan. "Firms have been saying for years, we want you to sell more advisory business, yet then pay the advisor on monthly production.

Zapping Conflicts of Interest

The third alternative plan targets yet another objective. It looks to eliminate conflicts of interest by awarding advisors the same commission credit across all products. Under this pay plan, an advisor would have the same percentage, say 2%, added to his or her pay grid, regardless of whether he or she sold a variable annuity or a c-share mutual fund. That means that if the advisor were to sell a $100,000 investment, he or she would add another $2,000 to production.

Under conventional comp plans, advisors would typically earn more commission credits for selling variable annuities than mutual funds. A variable annuity might add 4% to the grid, while a c-share mutual fund might only add 1%.  

"It pays for assets instead of paying for the commissions that those asset sales bring," says Bielan.

This plan was created partly in anticipation of the Department of Labor's fiduciary proposal.  If the rule is enacted, banks seeking to continue charging commissions under the rule's Best Interest Contract exemption will have to pay advisors the same for selling the same types of products.

"I think it was done with some of that in mind," Bielan says. "Without knowing exactly what the DoL rule is going to be, it still may not work, but I think they're taking a great step."

Price of Change

Regardless of the type of alternative plan implemented, the three banks suffered severe consequences, with each losing 25% to 50% of their advisor force.

"Until wirehouses start to pay differently, it's very hard for a bank firm to effectively compete with a non-traditional plan," says Bielan. "It's very hard to compete for advisors."

Bielan does not encourage banks and credit unions to implement alternative comp plans unless they're willing to lose up to half of their advisors. The resolve to switch may be strong, he says, but once advisors start to leave, revenue begins to fall and "analysts start talking about the business," the resolve rapidly fades.

"Unless you have the resolve to start over with a new compensation approach, it's a difficult way to go," Bielan says.

Institutions considering alternative comp plans should at least mitigate the risk of losing advisors by making the transition to the new plan more palatable.  For example, they might guarantee that an advisor won't earn less in the first year under the new plan than they would have earned under the prior plan.  Another accommodation is to allow advisors to "earn out" of the new plan if they meet certain corporate objectives, like producing 25 financial plans.  They might also offer the "earn out" option to advisors producing more than $650,000.

"That way you don't upset your top 20% or 25% of your advisors," Bielan says.

Read More:


Like BIC’s Facebook page here.

Follow BIC on Twitter at @BIConline.

Join BIC’s LinkedIn Group here.