I give the wirehouse brokerage model a lot of guff because of how antithetical its structure is to client success. The conflicts, in my opinion, are unresolvable and endemic. The whole thing should die and be reborn – just as it was in the UK when the FSA banned retail commissions and moved everyone dealing with the public to an advisory model and away from the pushing of products.
That ain’t happening any time soon, given the power of the brokerage lobby and its ability to literally help write the regulations with cooperative members of Congress.
To reiterate something I’ve said many times over the years, individual brokers are not bad people. Most of those I know are conscientious, hardworking and extremely dedicated to their clients. Rather, it is the compensation model and sales-oriented culture of these firms that sucks. This is why so many of the big teams and “major producers” I know are actively exploring a breakaway as we speak.
This week, an amazing story came to light about brokers working in the UBS office in Puerto Rico and their courageous fight back against the tyranny of conflicted sales quotas and proprietary schlock products.
Reuters has the money-shot:
In April 2011, two years before their prices sank, a slew of bond funds that were being sold by UBS’s Puerto Rico arm appeared to its brokers to be such risky investments that they balked at promoting them to their clients.
Their misgivings became so great that when a group of brokers was asked by the firm why they weren’t selling more of the funds’ shares they came up with a list of 22 reasons, according to people familiar with the matter. The concerns, which the brokers said were based on their own views and feedback from clients, included allegations the funds suffered from low liquidity, excessive leverage, oversupply and instability. They were wary, in part, because many of the funds were loaded up with debt of the Puerto Rican government and related entities that was underwritten by UBS, the people said.
What was the UBS response?
Here’s what the branch manager said, quoted word for word from a recording made by one of the brokers who was press-ganged into attending the meeting: “You need to focus again on the attractive benefits of our funds and stop this nonsense that there are no products available – because if there are no products, go home, get a new job!”
Having spent more than ten years as a licensed broker prior to strangling my Series 7 license and dumping it in a river, I can attest that this is the norm, if not in actual words then certainly in spirit, from a cultural standpoint. This kind of harangue is almost never conveyed this way, this overtly. It’s typically more subtle, but everyone in the firm knows how it’s gonna be. Move product or move yourself to another firm. And if you don’t play ball, don’t ask for anything – no hot IPOs, no ski trips or Caribbean junkets, no golf outings, no Yankees luxury box tickets. Everybody plays, to the extent they have to.
But sometimes the brokers put their foot down too, as in this particularly egregious case.
Matt Levine at Bloomberg View is tickled by this story and is as amused by it as I am moved:
let’s look on the bright side: Those brokers nailing their 22 theses to the conference-room door are sort of heartwarming, no? They really were unhappy about selling garbage to their clients; they really did stick up for their clients against their firm. It could have been worse. There is rather a lot of precedent for salespeople selling products they don’t believe in and keeping quiet about it for years, until their eventual tell-all book or whistleblower lawsuit. These brokers got out in front of the problem.
When you hear a glimmer of hope for the industry like this one, it reaffirms the fact that, in the end, we’re talking about mostly good people trying to do a good job in a bad comp structure.
Just how bad is the comp structure? Really bad and totally inexplicable. One friend of mine at a major wirehouse has described his 2015 compensation grid as a “combination treasure map and scavenger hunt for extra fees where I have to pick which hoops I’ll jump through to please both my complex manager and my clients.”
Norb Vonnegut at the Wall Street Journal took a poleaxe to the new breed of comp plan this week…
payout grids are out of control. Wirehouses are “compressing” a simple equation—gross revenues times payout equals W-2 income—into 30-plus pages of mind-numbing, what-if scenarios:
What if you sell this? What if you sell that? What if your 2015 revenues fall short of last year’s numbers?
Your grid is a numerical dump, and 30 pages may understate the complexity. One shop uses three separate documents, totaling some 70 pages, to explain how its financial advisers get paid. There’s the plan itself, an overview of the plan and, finally, a compilation of answers to frequently asked questions…
What about clients?
As a general rule, they don’t see the grids. But are their interests served when companies single out individual products like margin loans and pay their advisers to promote them? At one shop, advisers get 35 basis points for encouraging their clients to take more risk.
“There can be a direct link between compensation and advice given to clients,” says Michael Zeuner, the managing partner of WE Family Offices.
“The more complex it is,” he says, “the more it may drive brokers to focus on their own compensation rather than what’s right for the client.”
How many more brokers are going to look at these 30-70 page scavenger hunts and stand up for themselves and their clients by breaking away?
I think more than a few.