Some banks have been changing the way they compensate their advisors. Instead of paying commissions on production, they have been moving towards a salary plus bonus plan. Obviously a few banks moving in this direction does not make a trend, but I have heard rumblings of others considering such a move.
Is this type of move a good idea? Consider the history of compensation for advisors in the bank channel. In the 1970s and 80s, banks aggressively started getting into wealth management. They saw how successful Wall Street firms were and realized they were missing the boat. Indeed, they had a ready-made audience of customers who were already buying financial products and services.
Back in those days, the penetration rate amongst most banks was zero. Meaning, their customers buying traditional banking products were not offered investments. These customers were going to the big Wall Street firms for their investment needs.
Regional breakout of bank advisor compensation shows the South edging out other areas. Source: Bank Investment Consultant research
As laws changed (and profit targets increased), banks started getting more heavily into wealth management. In the beginning, banks implemented investment services like they implemented anything else -- slow and safe.
For many years, financial advisors in bank models were not getting rich. Their incomes were not bad, however the performance of the Wall Street firms were much better. Banks started bringing in outside consulting firms to discover why they were not growing faster in wealth management. After spending millions, banks discovered the big difference. Advisors at Wall Street firms are compensated 100% via commission. They soon learned if you want very high performing individuals you must tie their compensation directly to performance.
Once a few big banks started moving in the direction of commissions, others soon followed.
I remember working at First Union in the early 1990s under the leadership of Ed Crutchfield. Crutchfield understood as early as the mid-1980s how important it was to offer investments within a bank. He also understood the importance of commissions. He aggressively started licensing every banker willing to sign up. In the early 1990s, it paid off and First Union was one of the leaders in licensing bankers, along with his rival, Hugh McColl at Nations Bank. Other banks watched these big bank moves and soon they got on the commission train.
A breakout by bank size shows that the biggest banks do not necessarily offer the highest compensation packages. (Bank sizes were defined as follows: Community Bank, up to $1B in assets; Super Community, $1B to $10B; Small Regional, $10B to $50B; Large Regional, $50B to $100B; and Big Banks, more than $100B.) Source: Bank Investment Consultant research
Some banks today still struggle with compensation for their advisors. This is mostly because banks are extremely conservative and financial advisors tend to be risk takers. Bankers managing advisors is akin to a compliance officers managing salespeople. One is constantly wanting to say “No,” the other “Yes.” Despite this, banks have grown their wealth management divisions, but there is still work to be done. Most of them still have over 90% of their customers going elsewhere for their financial planning needs. As a result, banks are afraid to open up their customer base to their own financial advisors.
Indeed, advisors at most banks still have to wait for an introduction from a banker to a customer. This severely hinders the sales process. Here at the Rummage Group, this is a common complaint we hear from bank advisors. They don’t understand why they can’t reach out to customers who are getting these services elsewhere. The bank wants to provide the service, the clients need the service and advisors want to sell the service. The only thing stopping them is the bank holding them back like a racehorse at the gate.
Instead of letting the motivated horse run, some of these banks are choosing to go in the opposite direction. They are choosing to take their advisors off of commission and going back to the model that never worked in the first place, i.e. salary plus bonus. This decision is causing them to lose their top advisors and many more will follow. Motivated advisors do not like being on a salary where the bank, rather than them, decides what they are worth.
I applaud banks for trying to do something to reduce turnover and increase revenue. However, what they are doing will have the opposite effect. If banks want to lower their turnover rate and increase production, the answer is simple. 1) Keep your advisors on 100% commission and make sure their payout is competitive. 2) Have a strong transition package to attract the top performing advisors. 3) Open your customer base up to your advisors, instead of making them wait for a referral. 4) Tell the compliance and operations departments to stop treating your revenue producers like the enemy.
There is a way to make sure advisors are adhering to industry standards and keeping them happy at the same time. The good news is, there are a few banks which are already implementing this course of action with great success and I hope there will be more.
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