The Wirehouse Response to Tough Markets? Overpay Brokers.

Markets are tough right now, even for the veterans.  Clients are looking to stay in cash as the twin deities of Diversification and Buy-and-Hold they used to worship have tag team-wrestled their hearts to the mat.  Gross production is down, attrition is up all over The Street.

So how do the wirehouse brokerages respond?  They pay record amounts for brokerage and advisor talent.  Brilliant!

Apparently the rate of deals is slowing down even as the price tags are heating up.  Sounds like the end of a trend to me.  Registered Rep Magazine gives us an idea of the compensation climate at big firms right now:

The numbers are impressive: Depending upon the firm and the broker, the total value of a deal can reach as much as 350 percent of a rep’s trailing 12 months’ production…and the up-front portion a top broker recruit can receive has risen substantially because firms want to make up for deferred compensation that will be lost when the broker leaves his former wirehouse firm.

But while the value of recruitment deals has doubled over the last several years…so, too, has the length of service firms require before deferred compensation vests—now typically in the range of nine to 10 years

What gives? 

When the dust settled on the credit crisis and the entire Pu Pu Platter from Hell that came with it, Wall Street learned something about its various components.  It came to realize that while trading and banking were sexy and outrageously profitable in good times, asset management fees were way more stable and dependable.  You could budget based on money management income.  M&A dealflow or mortgage trading?  Not so much.

What this realization led to was an overpayment cycle for talent that is currently heading into its second year.  Wirehouse firms have been taking advantage of the tumult of the Morgan Stanley/Smith Barney, Wells Fargo/Wachovia and Bank of America/Merrill Lynch hookups, pinching guys from each other like the blind witches of Greek myth fighting over The Eye.  Now this frenzy has entered an even more ridiculous phase as registered reps and advisors find themselves being offered 250 to 350% of their trailing year’s production.  This is big money, but it’s coming with some serious strings attached – ten year contracts in some cases!

I would say that the recruitment wars have gotten a wee bit overheated. 

And these are almost all bad deals at this point.  Nobody in this industry actually produces what they say.  Says one branch office manager at a NY wirehouse:

“But, I don’t think it’s working as a whole. Because of the desperation to recruit, firms have been overpaying. [UBS Wealth Management head] Bob McCann admitted that 75 percent of the brokers his firm hired earlier through these deals did not hit their numbers. They overpaid for these guys at the worst time, and now they’re bleeding red ink.”

There are three primary reasons for this recruiting hysteria, based on what I’m seeing and hearing:

1.  Scarcity of Clean Licenses:  You have no idea how scared to death compliance officers are to bring in producers with multiple complaints on their CRDs.  Headhunters are told in no uncertain terms that in the post-crash, post-Madoff world, they shouldn’t even bother bringing in a candidate with multiple blemishes on their license, no matter how much revenue is on the table.  Compliance simply cannot bear the increased regulatory scrutiny in this environment.  This means that the advisor with both big production numbers and a squeaky clean history is worth that much more to the hiring firm.

2.  Aging Sales Force:  Industry-wide, the average age of financial advisors is in the 40’s!  This is remarkable and in reality, it means that firms are overpaying because of how limited the talent pool is at the up-and-comer end.  When there are fewer rising stars, firms must do what the NY Yankees do – sign aging veterans to massive deals.  We discussed the aging of the industry here at length, in case you missed it:  Why the Kids Don’t Want to be Financial Advisors

3.  Concentration of Millionaires:  There are fewer millionaire households in America post-2008 as a result of the decline of stocks and real estate.  According to the Registered Rep article,  the amount of millionaires peaked at 9.2 million in 2007 and is closer to 6.7 million now.  These millionaire households are also being consolidated at the advisor level as wirehouses prune the lower producing advisors from their ranks and help their top earners pad their books with even more assets – in other words, wirehouses have created their own compensation-hungry monsters by helping them get bigger at the expense of smaller producers.

Like all manias, the wirehouse recruiting rampage will burn itself out when enough dumb deals, combined with slow markets, pile up.  And then we will return to our regularly scheduled Mass Exodus to the independent channel – where freedom, creativity and results trump the marketing machines of Wall Street’s declining dynasties.

Sources:

Wirehouse Recruiting Stalls, Deals Keep Rising But Fewer FAs Moving (Registered Rep)