When HSBC decided to do away with commissions in 2013 and pay its financial advisors a fixed salary and discretionary bonus, industry pundits presaged a mass exodus of advisors from the bank channel into more lucrative areas of the financial services industry. While that hasnt happened, there is a growing sentiment that the salary compensation model could become the norm for bank advisors. That has spooked the industry, especially those for whom the mere idea of a set salary is anathema.
Many were convinced that the talent drain that would supposedly result from clipping advisors compensation wings would affect HSBC. Indeed, some in the industry say the bank has lost its top advisor talent. HSBC declined to make an executive available for comment.
But in this post-financial crisis world, where both regulation and capital constraints continue to pressure banks, there are those who see a paradigm shift within the financial services industry that includes greater accountability, increased transparency and, above all, deeper and more client-centric modelsall of which could mean a decline in commission models.
Given current practices, compensation in the financial advisory profession is not really a barbell, with salaries and bonus structures on one end, and pure 1980s style commission-based models on the other, says Nalika Nanayakkara, a New Yorkbased principal and wealth management practice leader at Ernst & Young. In banks as well as in wirehouses and independent firms, both models are mixed and matched in different ways, some firms offering salaries and bonuses to younger advisors and then moving them onto a more commission-based model as they progress in their careers.
Its also important to note that within the bank universe, theres wide segmentation in the ways that different bankslarge, small, national, regionalare handling compensation, says Paul Werlin, president at Human Capital Resources. Depending on the bank, advisor compensation spans the gamut from being wholly commission based to salary based, with differences in the amounts of upfront cash being offered to new advisors coming on board, he says.
This is reflective of a business in flux, Werlin adds, and it attests to the fact that advisor compensationsalary or commissionis becoming part of a larger strategic discussion and not an end in itself. Today, we just cant look at compensation in isolation, he says.
Compensation is now part of every discussion of what a bank hopes to achieve with its wealth management business, and how this business fits in with the wider institution. Its a broad discussion that includes age and experience level of the advisorsand their relationships with clients.
Still, there are a number of factors that make bank programs successful for banks as well as for advisors looking for employment. And many of these factors are as important as compensation.
Top-tier bank programs, Werlin says, have fully integrated business units and offer excellent referral streams to their advisors, among others.
The prevailing mind-set behind compensating bank advisors through a salary instead of on a commission basis lies in the idea that, ultimately, a bank will be able to achieve greater profitability. There is some truth and validity to that in the longer term, most agree, and it may play out favorably for banks as the sector evolves over time.
However, many also believe the short-term effects of the transition will be anything but pleasant.
Unfortunately, the costs borne in turnover, dashed dreams and lost talent will have a lasting impact on the traditional bank advisor role, says Dan Overbey, president and managing director of Atlantic Capital Advisors.
You just cant take strong-minded individuals, driven to be the very best that they can be and put them on a salary and dictate what theyre worth, agrees Rick Rummage, CEO of the Rummage Group, a career consulting firm for financial advisors, and regular contributor to BIC.
Its obvious that the commission model costs less for banks because it doesnt require much capital investment. Salaries and bonuses end up increasing costs and, in Rummages view, the situation is even worse because the biggest challenge for banks is still their unwillingness to open up their customer base for advisors to be able to reach out to and then move forward with on their own. Theres also a big disconnect still between banks and advisors, he continues, because the guy at the top running the [wealth management] division never was an advisor. At most banks, he was a banker who rose up through the banking ranks and doesnt understand the wealth management business and the mind-set of advisors.
Rummages list of how banks rub advisors the wrong way is longhes seen banks tinker with the number of products advisors sell, hes seen them change the technology that advisors use and replace it with a lesser alternative.
At the end of the day, what matters most for a bank is the bottom line so wealth management cannot be truly successful unless a bank puts it on a pedestal and really emphasizes the importance of wealth management as a business, and doesnt view it as an afterthought or a necessary evil, Rummage says.
On the other side of the spectrum, some banks get wealth management right on all fronts, compensation included, he says. He counts SunTrust and Wells Fargo among that group.
The move away from traditional commission payouts to set salaries would seemingly promote a more stable advisory workforce that is centered around client success and satisfaction. But even though they may undoubtedly place value on those factors, many advisors in bank channels unfortunately view the different iterations of the shift as a dumbing down of their role as professional advisors.
Thats because compensation is still front and center for many advisors, the one thing that inspires, motivates and invigorates them to be the best that they can be at their chosen profession, and they feel that this shift in total compensation will change forever the advisor bank role, says Overbey. Many advisors who sought a Series 7 license as a professional differentiation that would prepare them for a successful brokerage career now view their position as little more than licensed bankers.
If, as they are slated to, commissions begin disappearing, Overbey believes that the effects will be counterproductive for banks, and will promote a high turnover and increase the exodus of advisors from banks to other kinds of advisory firms. Many banks have, for example, created what he terms a more generalist approach that combines deposit, loan and investment sales into one role and are offering a watered-down commission plan by tying the bonus across these product categories.
The better, more seasoned or accomplished advisors who have long been accustomed to a more lucrative payout will depart an arrangement where banking metrics deposit or loan growth are built into their commission arrangement, he says.
IF IT AIN'T BROKE
For Rob McCabe, chairman of Pinnacle Bank in Nashville, a pure commission-based compensation structure is the only way to attract talented financial advisors who have the ability to service a sophisticated investor base. Pinnacle has always paid its advisors in this way, McCabe says, and he sees no reason to change things.
Weve been at it for 15 years and we have never had any people leave us, he says. Thats why I dont believe that salaries are a more appropriate model and if its about compliance, we have a strong compliance function that wont allow for any inappropriate sales, so I dont see any reason to replace the commission model.
The bank focuses on recruiting people who can pay themselves in the first year, who are mid-career and have an established book of business from which they can migrate 80% in the first 12 to 24 months that theyre with us, McCabe notes. And this fee structure hasnt caused any friction between wealth management professionals and bankers, as some pro-salary factions allege, McCabe says. (Raymond James is the TPM for Pinnacle.)
We also have an open-architecture platform and this makes both bankers and brokers feel that they have the best chance for fostering a successful, long-term relationship, he adds.
Many banks are supporting their advisor workforce and doing so in different ways, whether it is through simplified planning tools or centralized support teams that consist of planning experts. But today, the prevailing theme in the wealth management industry is goals-based investing, meaning that it isnt so much about performance this year or next, but rather about meeting clients lifetime financial goals, and those advisors who are successful are the ones who keep focused on their clients long-term financial health and not on short-term payouts, says EYs Nanayakkara.
But the million-dollar question is: Will making compensation a top priority and paying bank advisors on a pure commission basis will support the drive toward greater client satisfaction and client retention? Additionally, will it be conducive to fostering the kind of long-term advisor/client relationships that are key to realizing long-term financial planning goals?
For Mike George, president of Fulton Advisors, the two are definitely not mutually exclusive. Ultimately, he says, success on all fronts lies in an advisor being able to say, I want to do my job well, serve my clients well and feel that I am being well rewarded. (Raymond James is the TPM for Fulton Financial.)
But there are others who feel that times have changed, that the financial crisis and the recession have influenced the way many advisors think and feel about compensation and about their profession.
Many clients were badly burned in the crisis, and even though a number of years have passed, they have yet to build up their trust in financial advisors, Werlin points out. This means advisors want to be sure of not only having easier access to clients, they also want to be able to hold on to those clients and build up their relationships with them. As such, job satisfaction has become more about overall quality of life, Werlin says, where a base salary may not be such a bad thing. I dont see it as leading to a brain-drain.
Banks can always leverage their database of customers to attract good advisors. This is particularly appealing to advisors entering the workforce, Werlin says. And at a time when the reality of an aging advisor population is perhaps the biggest challenge that the entire industry is facing, banks, thanks to their many attributes, have a chance of standing out.
According to Luke Dean, professor of personal financial planning at Utah Valley University, recent graduates and students of financial planning programs have a very clear and very huge preference for a known amount of salary over an unknown amount of commissions. Dean goes on to say they have an aversion to largely commission-based compensation because they feel that a heavily commission-based compensation model puts them in a position where they have to be a product pusher instead of a trusted advisor.
These young people join financial planning majors because they want to help people, Dean observes, and this is one of the few options in a business school that enables them to directly work with and help people and still make a good living. They choose to study financial planning because they want to build lasting relationships with the clients they serve, and rather than looking to build up an individual book, they are looking to work for an employer that shares the same culture and philosophy.
Todays financial planning graduates are looking for stability, a place to start at and grow with, Dean adds. They want competitive compensation but they prize a culture where client service matters more than commissions or quotas. It doesnt take long for a student or recent grad to figure out whether a bank is focusing on clients or commissions, and though many students would like to work for banks, banks will continue to struggle to attract and retain the best talentespecially the best female talentthat is, if they want product pushers, not competent, trustworthy, credentialed professionals.
BEEFED-UP SUPPORT SYSTEMS
Fultons Mike George is well aware of the aging advisor population and the impact this has across the industry.
All the same, hes still convinced that if Fulton implemented a salary and bonus compensation model, we would lose our top advisors. The entire industry is starving for good talent, he says, so the one thing we can differentiate ourselves by is compensation.
Today, banks face many challenges, not least of which is pressure from regulators and bank management to eliminate the commission-based model and ensure that client relationships are meaningful and long lasting. Fultons goal, he says, is to remove the obstacles that advisors face and to offer the best support system to its advisory force to then serve their clients to the fullest. Plus the firm has carefully analyzed the wealth management books to have a handle on where things stand and where new business can come from.
We have had each of our advisors segment their books to get a sense of their clients and we have done studies that have shown us that 98% of our business comes from A and B relationships, he says.
We have a fee-based structure that allows advisors to deepen those relationships by keeping them motivated to meet them often, keep the relationships intact and grow them so that those folks dont move on. We have also asked advisors to identify their C and D clients so that we can see what we can do to drive the book in that direction.
This approach allows Fulton to bring on college students or management trainees and put them through a process after which they can migrate out to work with a senior advisor.
Such a moves comes with the goal, George says, of working those secondary relationships to make them more important over time, thereby providing them the opportunity to want to stay on at the firm for a longer period of time, if not for the rest of their careers.
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