HSBCs decision to put its advisors on a salary is a risky move that many in the industry will be watching closely as banks struggle to make their wealth management programs stronger and more profitable, say observers.
The move struck many as a shocking departure from the industry-wide practice of paying advisors on commission, typically a percentage of the revenue they generate for their banks.
HSBCs move is a sea change, said Steve Saltzman, a managing principal of Kehrer Saltzman & Associates. From a cultural standpoint, its pretty harsh in terms of the changes.
Under the new compensation structure, advisors are paid a salary plus a quarterly discretionary bonus. HSBC implemented the new system to remove all product sales incentives so [that] employees are rewarded on client experience, sales quality and values measures, Neil Brazil, vice president and senior manager of Communications at HSBC North America, said in an email.
Industry experts have generally resisted the idea of putting advisors on a standard salary-and-bonus compensation structure, saying that it would kill their motivation to build their businesses and cause them to leave for other banks where they can make more money.
That prediction is bearing itself out as many HSBC advisors are reported to have already left the bank for other organizations, according to Rick Rummage, founder and CEO of the Rummage Group, a career consulting firm. HSBC doing that is insane, said Rummage. Their revenue will drop because of what theyve done.
Others agreed. When you move to salary, good reps will typically leave because they can make a whole lot more under other compensation systems and youre left with the poorer reps that really cant make it in the commission system, said Nathan Bergeland, founder and CEO of USAdvisors Network, a management consulting firm.
I was kind of shocked by it, Bergeland added. You see all sorts of firms do all sorts of crazy things. I think this is something that is a little bit crazy.
Scott Stathis, managing director at BISRA, a research and consulting firm for banks and credit unions, noted that advisors on salary and bonus are 16% less productive than commission-oriented advisors, according to the 2012 LPL Advisor Benchmarking Study.
Others, while skeptical of HSBCs move, were more sympathetic, saying they understood the banks desire to better align advisor and client interests by removing commissions as a sales incentive. While sometimes that [commission] can get disconnected from what the right thing is for the client, thats been culturally how advisors have been compensated, said Saltzman, adding that the general shift to fee-based accounts helps address the issue HSBC is trying to resolve.
A few even see it as a good idea. Even though banks run the risk of losing their best advisors, it would help improve wealth penetration rates, or the percentage of banking customers who have an investment with their banks, said Wayne Cutler, a partner at management consulting firm Novantas.
Differences in compensation structure are a sore point that keep bankers and advisors at many banks from working together and reeling in more customer business, said Cutler. By putting advisors on a similar compensation structure as those of bankers, banks can help neutralize the animosity between the two groups, the thinking of many experts goes.
The salary-and-bonus structure that HSBC has put in place for advisors is a wonderful way to present the overall value proposition of the bank, which include wealth, to the customers, and its a much more collegial approach to doing that, Cutler said.
Some see the benefits but recommend that banks make compensation changes gradually. I think its a good idea to experiment with that [salary and bonus structure] incrementally so youre not just throwing out a system that works fairly well, said Kenneth Kehrer, a principal of Kehrer Saltzman & Associates.
For now, its a waiting game. I think its going to be interesting to see how those changes pan out for HSBC. I would suggest that if they have good results, that maybe other firms think about that, said Saltzman.