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More Banks Expected to Move Advisors to Salary

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Expect more banks to take the same leap of faith that HSBC took when it moved all its advisors to salary from commission earlier this year.

Wayne Cutler, a partner at management consulting firm Novantas, sees banks making similar moves in the next two to three years. “Two to three years down the road, I’d be surprised if for the top 30 banks at least half of them haven't moved to the new structure,” he said.

The banks are not likely to go cold-turkey, though, as HSBC appears to have done. They will probably phase in the new pay structure gradually, Cutler said. A number of the top 30 U.S. banks are “having dialogue” about what a change to a salary-based compensation structure would mean and how best to implement it.

Some banks are discussing three-year transition periods, including “grandfathering” arrangements that would allow existing advisors to stay on commission for a period of time with new advisors being paid on the new salary system, according to Cutler.

“They are trying to balance two objectives, which are realigning the compensation structure to meet the business objectives while retaining their best advisors,” Cutler said.

Banks toying with the idea of switching their advisors to salary are likely to run two compensation systems in parallel to minimize the risk of losing their best advisors, which banks realize is significant, said Cutler. They fear losing their top advisors and “average down,” a term used to describe the decline in average production per advisor. The industry average is $300,000 - $350,000, he said.

Still, Cutler sees banks moving toward a salary structure for a number of reasons, the top being profit pressure. “They need to find ways  to do two things; one is to make sure that margins on that business meet hurdle targets for the bank, and if they’re paying out too much or the majority of the revenue to the brokers, it’s not going to meet those hurdle targets,” Cutler said.

He also sees the move to salaries as a way to integrate bankers and brokers, who have long disliked each other and refused to work together in part because they’re compensated differently. By putting the bankers and brokers on similar pay systems, staff and executives would be able to move in a more seamless way between the two groups. “If you are all are on a similar type of compensation structure, it’s a lot easier to move people in and out of wealth,” Cutler said, adding that people can move from banking to wealth and from wealth to banking.

Other observers, however, aren’t at all convinced that banks are about to move away from commissions anytime soon. Many feel there are other ways to address compensation and related cultural and integration issues that banks are struggling with.

“I don’t think a lot are going to race out and change wholesale the method and structure of compensation,” said Mike White, president of Mike White Associates, a consulting and research firm based in Radnor, Pa. “Most everybody will probably tinker with it.”

White believes that there are other ways for banks to begin to approach compensation issues. They could, for example, seek different methods and levels of “equivalencies” to make sure that brokers and bankers are treated “equal in pay.” For example, banks might consider putting bankers on a schedule of production equivalent to that of advisors, he suggested. Or they might want to emphasize more fee-based products among brokers.

HSBC’s sudden switch to salary-based compensation for advisors is going be a challenge, said White. For good producers, “it’s a major change, a major sacrifice,” he said. “They’re not likely the ones who are going to stick around for all of this.”

Ultimately, it’s the consumer, not industry, that will move the business away from commissions, said Tom Kane, managing director at KaneCarlton, a management consulting, coaching and advisory firm. Commissions, he said, is “such an ingrained way of doing business,” it’s unlikely that industry will drive the change, he contended.

“We’re trying to make it industry-driven and I think that ultimately it will be consumer-driven,” he predicted. He noted that discount brokerage firms are starting to bring awareness that “commission brokers may not have client’s best interests at heart,” citing TD Ameritrade’s new commercial exalting that the fact that its “people are paid on salary, not commission.”

“Somebody will come up with they call a ‘category killer’,” said Kane, “the Netflix of our industry’.”  Upstarts like WealthFront, an online financial advisory service that does “sophisticated things at a cheap price,” Kane said, are more likely to wean the industry off commissions. “It’s those types of things in my opinion that are shaping the industry and will shape compensation in the way that business is done in the future,” he said.

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