Poverty Payouts

Poverty Payouts in the Securities Industry

About a decade ago, myself and the head of wealth management at a major bank-owned firm took a group of senior producers on a “due diligence” trip to Ireland. As a sign of recognition for their achievements the advisors were put up in the very stately and prestigious Dromoland Castle – doesn’t get much better. After check-in and registration the brokers joined us in the drawing room for a welcome business meeting wherein, hopefully, all could join in and express their delight at being a part of this venue. Let me see if I can remember and paraphrase the first advisor’s opening comments:

“While it’s all well and good that you guys have taken the time and trouble to have us over here, it really doesn’t change the reality of working for this firm. Regardless of the production and assets that we bring in the door year after year all we get from you is a nickel and dime scenario and worse, yearly cuts in our payout. We’re sick and tired of you guys stealing from us!”

I think I remember it rained for the balance of the trip.

So, fast forward to the Christmas of 2014 just passed. Did Santa bring you a payout present OR a nicely wrapped lump of coal with a card on which is written – “welcome to poverty payout land?”

The Employers and the Drive for Profitability

Remember that under this model you work for the firm and they (with a few exceptions) own the assets. Without question, and back in the day, revenue took precedence over assets in terms of an advisor’s net worth to the company. Over the years however, the margins began to thin as support costs moved up and the turn rate produced a very recognizable increase in potential liability. As the banks gradually increased their consolidation of the securities industry the focus of quality, business style and compliance moved into a higher gear in order to make their asset produce a return on investment on a more consistent basis. In order to increase their profit margins the major firms embarked on a course of action that would forever change the make-up of the industry:

– jettison the low asset client either out the door or into a low service environment
– tighten up dramatically on the payout factor as it applied to ticket size
– raise the production bar qualifying for sales aide support
– focus on acquiring a larger percentage of HNW clients
– move away from high turn transactional business and heavily promote platforms generating
more stable and recurring revenues

How They Did It – The Winners and Losers

The desirability for a sharper bottom line invariably leads to a lower payout on production and is achieved in many forms; the overall long term process is often described as “Nickel and Diming”. Nevertheless, the controlling factors within the industry have been relentless in their ongoing pursuit of profitable and compliant business models and for those brokers who will sign on for the controlled voyage:

– inexorably raised the minimum production bar under which a payout of 15% – 20% would be
assigned to all business produced

– drove the recurring revenue business to a higher payout bucket (fee-based, trailers, etal)

– moved the brokers and DIA’s (rookies) who were performing under the bar to a short term
performance-improvement-plan and when they fail to measure up and are terminated, then
transfer the assets to an advisor with a higher quality business

– rewarded the advisors who have instituted a practice metrics program into their business which
would encompass a higher quality and well laid out investment strategy, a focus on H.N.W. clients
and an emphasis on bank related products and services

– incorporated corporate stock (in various forms) into senior producers payout program which in
addition ties the advisor to the firm – for better or worse

– put restrictions on the type of business allowed ie. D.S.C. fees on mutual funds, higher risk option
strategies,etal

– initiated a rookie program designed to build and bolster a senior producer’s business which is
totally committed to the “program” – the costs of a rookie program versus the ever rising failure
rate does not spell “profitable”

The Employees – Choices in a Changing World

With a production record of much under $400,000 annually, a business style with a low percentage of fee-based assets and working for a firm with an increased focus on adherence to practice metrics, the exit sign is flashing big time. Even for advisors who are currently above the cut line, the question of operating style, profitability / drive factors, stock handcuffs, payout and costs, etc. will loom larger in the future and in their considerations on where they should best be earning their living.

So, what are the alternatives?

• Give up the independence of a separate IA code and join an established team as an associate
broker. This way earnings can be stabilized via a salary which will include a bonus or payout
factor for the long term.

• Sell the book internally and get a real job or sell the book externally as part of a move to a
different firm. Regardless of the current firm’s book- buy policy (succession planning etc.)
the “double dip” approach is an alternative strategy in any age category.

• If either of those is not in the cards and the advisor is not ready to deep six all those years of hard
work, the prospect of joining a major and well supported IIROC firm with a principal / agent
platform is the best bet. This can be done most easily by being a part of an existing independent
branch made up of like-minded people where the superior payout factor will ensure survivability.

• Remain in an employee model with a major and highly-ranked firm where payout and bonus
policy is stabilized and not subject to the variations of an ever-rising productive standard.

The world of the Securities Industry continues to change and will continue to do so at an accelerated pace. The advisors of today must decide on the kind of environment they wish to live in as they approach their tomorrows. Advisors have long thought of themselves as independent business people – for the majority in the industry that is no longer the case. In the end profitability is the word – and as Machiavelli so noted, “ the end justifies the means”.

Poverty payouts – is someone stealing from you?

Written by: Brian L.Curry, CEO, Curry-Henry Group (Copyright 2015)

“It’s a simple business but, it’s not easy”.