Wealth management industry reviews compensation (again)

UBS’ second-quarter results reveal the change in compensation structure in the US wealth management division has paid off. Profits rose 26% over the same period last year.

Tom Naratil, who took over as president of Wealth Management Americas at the beginning of 2016, implemented a strategy last year to reduce recruiting by 40% and instead focus on rewarding its top-performing advisers. 

Naratil, also now president of UBS’ entire Americas business, says that after months of speaking to advisers, it became clear that there was capacity to grow organically.

“At the same time, when you took a look at the industry, you could see that the competition for top talent had never been greater or more expensive,” he says. “As a result, we concluded that relentless and never-ending recruiting would not be a sustainable strategy for growth, so instead we decided to focus on retaining our best advisers.”

Indeed, the number of advisers at UBS Americas fell by 180 between March 2016 and March 2017 to 7,000, while financial adviser compensation expenses increased by $75 million over the same period. Profits year-on-year rose by $90 million. 

Adviser compensation has been rising steadily, in part as the US economy has improved, but also because a large chunk of the adviser population is reaching retirement age. According to Cerulli Associates, one-third of advisers are between 57 and 66 years old. As they leave the workforce, a war on talent and, therefore, compensation has followed. 

“We recognized that not only is it unsustainably costly to rely on recruiting in order to grow, it can also disadvantage clients,” says Naratil. “The constant churn of advisers changing firms and moving their businesses can be very disruptive and distracting. So, I think it’s fair to say that if the overall pace of recruitment diminishes industry-wide, that can only be a good thing for clients.” 

Morgan Stanley has also reduced its headcount by 130 over the 12 months to end of June. But not everyone is following suit. 

Bank of America Merrill Lynch has increased the number of its advisers by some 200 since the end of the second quarter of last year, but like both Morgan Stanley and UBS, it has been focusing on increasing productivity. That has risen from $978,000 to $1.04 million per adviser year-on-year at BAML. 

Centralized asset allocation advice and digital tools are assisting wealth managers in their aims, BAML says. Earlier this year, for example, the firm launched Merrill Edge Guided Investing, a hybrid robo-human digital advisory platform, and has investment decisions made by a central CIO office, like its peers. That frees up advisers to focus on developing relationships, increasing wallet and getting to grips with new products, the firm says. 

Similarly, Morgan Stanley has 3D Insights, which provides research and data to advisers to save them time and resources. 

Brent Beardsley, global head of wealth and asset management at Boston Consulting Group, says more wealth management firms with a wirehouse – or integrated broker – model are looking to increase revenues from advisers by automating advice: “If you look at the big wirehouses, you’ll see the role of the adviser has changed now that portfolio management is increasingly being managed centrally. They used to allocate assets and come up with new investment ideas. Now, in addition to developing relationships and winning assets, they are advising clients on products that are more akin to banking, such as home loans and mortgages.” 

At the same time, advisers are seeing their compensation structures change. Citi Private Bank made the move to an annual salary and bonus structure after it sold Smith Barney in 2010. 

Tracey Warson, Citi

“Commissions-based remuneration encourages product pushing,” says Tracey Warson, head of Citi Private Bank, North America. “We feel that annual salaries and discretionary bonuses drive right behaviour in line with client needs.” 

The move was not without challenges when it came to hiring. 

“Some people we hired were used to quarterly commissions for example, so we had to get them to trust us that their annual salary and bonus would be competitive,” Warson says. 

Citi’s remuneration structure has proved effective, she says, because adviser retention has increased, but it would be hard for a commissions-based business to make the same move. 

“Current financial adviser employees may find it hard to make the shift, but I think more banks are having to consider changing models in some way,” she says. 

JPMorgan Private Bank has a similar model to Citi.

Change is likely. Regulation, for one, is forcing the hand of brokerages to rethink commission. 

In the UK, the Retail Distribution Review called for greater clarity and an unbundling of fees to protect the consumer. That killed any remaining commissions-based structures. In the US, the fiduciary rule is having a similar impact. 

While such regulation puts pressure on revenues as consumers, faced with transparency around fees, choose to change their advisers, it also encourages wealth managers to switch to an advice-based, rather than a product-led, model. 

Bruce Weatherill, a UK-based wealth management consultant, says that in both the US and the UK, wealth managers are now looking to charge clients based on assets under management plus an administrative fee. 

Under Naratil, UBS Americas, for example, increased its pay-out for advisers with the largest books of business.

Weatherill says the AuM pay structure reduces conflicts of interest, but is not without its own issues: “Typically banks have charged 1% of AuM, which has meant that ultra-high net-worth clients are subsidizing high net-worth clients. There is an increasing move to variable rates that is likely to continue.”