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HSBC Does the Unthinkable: Moves Advisors to Salary

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HSBC has taken a bold move that many in the industry have long considered unthinkable: it has put all of its advisors on salary.

Under a new compensation structure implemented at the beginning of the year, advisors are paid a salary plus a quarterly discretionary bonus, marking a huge shift from being paid solely on commission.

“It’s upset everyone there,” said Rick Rummage, founder and CEO of the Rummage Group, a career consulting firm. The bank’s top producers in particular – those generating more than $400,000 in revenue – are “extremely worried and upset about it,” he said, adding that many have already left.

HSBC made the switch to align the compensation structure for advisors in the U.S. with those in the rest of the bank, said Steve Saltzman, a partner with Kehrer Saltzman & Associates.  “It puts the US organization on a consistent basis with the rest of the enterprise,” sources at HSBC told him.

But observers suspect that there are other reasons for the shift. Some say the desire to more closely align client and advisor interests may have prompted the change. Without commissions, the fear or perception that advisors are “spinning accounts” or suggesting products and services merely to increase their production is removed, noted Wayne Cutler, a partner at management consulting firm Novantas.

“Intuitively, it tells us that they’re interested in serving the customer in the right ways and removing the transactional focus to the holistic approach,” Saltzman said.

In a statement, HSBC confirmed what observers surmised. “HSBC introduced a new wealth incentive plan for its wealth sales team in the U.S. and other priority markets in January this year removing all product sales incentives so our 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. “The plan is aligned with our aim of building long-term sustainable relationships with clients based on trust and expertise, and with HSBC’s strategy and values.”

The move may also help resolve compensation issues that have long divided bankers and advisors, say industry observers. Advisors on commission often make more money than bankers who are paid a salary and a bonus. The disparity leads to a great deal of animosity and jealousy between the two groups and prevents them from working together productively.

“The resentment puts up barriers to the two organizations working together to refer business back and forth to each other,” said Cutler.

The reason for the switch may also have to do with the bottom line, Cutler added. “The wealth business is a good business. It’s a growing business, but the problem that many organizations have is it’s a costly business because you’re paying advisors a lot of the margin,” he said. By removing advisor commissions, which can be as high as 40% of production, banks can potentially increase the margin for their institutions, Cutler noted.

“My guess is that they will lose some of their best advisors since good advisors will always make more on commission than they will on the fixed cost of salary banks can afford to pay them,” Scott Stathis, managing director of BISRA, said in an email.

Many executives of other banks are considering similar moves, but they’re scared, according to Cutler. They fear that the “best-performing advisors will go someplace else where they can make more money” and “be left with the B-players,” Cutler said.

Many of these executives may be waiting to see how the move to a salary structure works out. “If everyone does this, great. If you’re the lone wolf out there, you’re going to scare everyone away,” Cutler said.

Advisors are loath to accept salaries because it goes against their nature, observers say. “A good financial advisor wants to be compensated in direct proportion to their results and therefore like to be on 100% commission,” said Rummage. Having a salary that’s dictated by the bank robs advisors of the control they need to thrive, Rummage explained. “Advisors like to control their destiny. They don’t like it to be controlled for them,” Rummage said.

Advisors are also concerned that they will have problems finding jobs if they leave. They fear that firms won’t want to hire someone on salary because most firms hire people based on their production.

Losing advisors is not the only risk of switching advisors to a “salary-and-bonus” compensation structure. Recruiting also becomes a challenge, particularly with competition for top talent being so fierce. “The challenge of moving away from that [commissions] and being able to retain and recruit advisors is significant,” said Thomas Kane, managing director at KaneCarlton, a management consulting, coaching and advisory firm. 

Observers speculate that HSBC advisors might wait to see how the new compensation structure plays out.  As they approach their second quarterly bonus payments, they may begin to get a sense of how the discretionary bonus program works.

Others, however, think otherwise. Most of HSBC’s advisors started aggressively looking around for other opportunities when the decision came out, Rummage noted.

“I’m sure they’re already running for the exits,” added Stathis.

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