Advisor compensation will be an increasingly challenging issue for investment programs and advisors in the bank channel during the coming year. There are a number of reasons for this as we outlined here. But the overall question is simple: Could putting advisors on salary really gain traction and become a trend in 2016?
Catherine Bonneau, CEO of Cetera Financial Services, thinks so. “I absolutely see a trend towards more salary for advisors.” She calls the DOL’s push to make advisors fiduciaries, and to raise the exempt salary level for avoiding overtime liability, “accelerants” pushing in the direction of more salary compensation for advisors
While Kevin Mummau, executive vice president at CUSO Financial Services, isn’t ready to call it a trend, he sees the salary or a forgiveable draw component of compensation rising. He says the DoL is a big driver in this. “A big factor in compensation changes is people asking, ‘What’s going to appease the DOL?’”, he says.
Some banks, however, have been paying advisors on salaries long before the latest fiduciary issue surfaced. Indeed, Farmers and Merchants Bank & Trust in Burlington, Iowa, has been blazing a trail in this regard, using the salary model for a decade. John Wagner, senior trust officer and head of the bank’s trust and brokerage unit, says he made the decision to put the small advisor team on salary when F&M Bank was merged with a second institution in West Burlington. “F&M had a trust unit but no investment program, and the other bank had an investment program but no trust department,” he says. “We decided to put them together in the merged bank, but the only way we could do that, I felt, was to compensate everyone the same way, and since trust officers are fiduciaries, we couldn’t have them on commission, so it was everyone on salary.”
He adds, “It was the best decision I ever made.”
As for the common concern that advisors won't work as hard if they aren’t on commission, Wagner shrugs it off, noting his bank's experience. “Our bank went from $80 million managed by the trust department in 2006 to $114 million today, and the brokerage went from $12 million in AUM in 2006 to $76 million today,” he says. “We have 1100 clients, 900 of them with the brokerage, and our net profit is 27% of the bank’s total net profit." He adds that his institution is perennially among Sorento Pacific's top 10 institutions in terms of AUM and other metrics.
Mike Schwenker (left) and John Wagner at Farmers and Merchants Bank & Trust have seen no ill effects from paying advisors by salary.
Program manager Mike Schwenker, hired by Wagner in 2005 to run the brokerage, where he also works as a financial consultant, says there has been no turnover in seven years among the small advisory staff. He says the salaries paid are regionally competitive. “We don’t have to match the commissions at the bigger banks,” he says, “because our people aren’t just about the money. But you do need to hire the right people if you’re paying salaries.”
Wagner adds while there are no grid-based compensation packages, people at the trust/brokerage unit do get a collective performance bonus if the unit has a good year.
Corning Federal Credit Union, in the company town of Corning, N.Y., likewise operates its Raymond James-affiliated investment program on salary only. And it has done so even longer than Farmers and Merchants--since 1994. Program manager Nick LaPuma, who came to Corning from Raymond James’ home office 2011, says, “What I liked when I arrived here was the sense of everyone being on the team…. it’s very clear that we’re all about the client. I wouldn’t have it any other way.”
John Houston of Raymond James isn't seeing wholesale changes in advisor compensation.
He notes that when one senior advisor retired recently, going out under a succession plan that paid him a declining salary over several years until all his clients had been shifted over to other advisors, the handover was easy. “If our advisors had been on commission, there would have been a lot of dissension over who got what clients,” he says. “Instead everyone worked together to match clients with advisors they felt most comfortable with.”
Corning pays its employees, including advisors, a bonus based upon the institution’s net income, not on individual advisors’ performance. LaPuma says salaries are high enough that the advisors are happy. “We haven’t ever had anyone leave the program so they could earn more,” he says.
Another potentially challenging trend in bank advisor compensation is a widening pay gap between the top performers and those advisors whose production falls below $600,000. This was highlighted in a recent study by Kehrer Bielan Research & Consulting.
Peter Bielan, a principal and author of Kehrer Bielan’s 2015 Advisor Compensation 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.” He says this growing divide is due to special incentives, as well as to 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 said, focused mostly on larger banks, but said that competitive pressures could mean the same divergence in compensation is occurring at smaller banks' programs.
Not everyone is quick to agree, however. Raymond James Managing Director John Houston said, “For advisors in the $600,000 to $750,000 range or higher, payments at many of …. our financial institutions are 45% or higher including deferred comp,” he says. As for advisors with annual production of under $600,000, he says, “We’re not seeing wholesale changes in compensation. We do a lot of consulting in our client base and try to make sure they have competitive pay packages.”
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