When Merrill Lynch unveiled its new compensation plans for this year, it made for what one analyst calls new marching orders for its financial advisors when it comes to new client accounts.
That is because those new compensation grids raise the minimum target for new client accounts from $100,000 to $250,000.
Some of Merrill Lynch’s financial advisors will now need to meet a $250,000 minimum before they get paid on new accounts. But financial advisors with 80% of their clients at $250,000 and above will still be able to collect 20% on those accounts falling short of $250,000, according to a copy of the compensation grids.
Once accounts falling short of the $250,000 threshold grow to meet that minimum, a financial advisor will receive compensation on that account. All of the assets, regardless of the threshold, will continue to count toward an advisor’s overall production.
The changes to the compensation program follows a year full of changes at Merrill Lynch, including shifts in its top leadership ranks and a continued push of Merrill Edge, its growing mass affluent advisory business.
Merrill Edge targets mass affluent clients, or those with between $50,000 and $250,000 in investable assets. Merrill Edge’s financial solutions advisors servicing those clients work separately from its Merrill Lynch advisor force, either out of that business’s advisory centers for the firm’s banking offices.
Merrill Lynch’s changes to its compensation plan are part of a routine process, according to a firm spokeswoman.
“Each year, we review financial advisor compensation and make strategic adjustments to ensure the plan is aligned with the interests of our clients, shareholders and advisors, as well as enhance our leadership position within the industry,” the spokeswoman said.
Alois Pirker, research director at Boston-based financial services research firm Aite Group, praised the new compensation threshold for new clients, saying it works for Merrill Lynch’s model and profitability goals.
“I think what Merrill is showing is the reality that many brokerage firms don’t dare to address, that they drive a full-service model, but very often they are working with too small clients,” Pirker said.
For Merrill Lynch’s financial advisors, that may still mean working with clients below the $250,000 threshold, say when a child of a wealthy client needs advice, Pirker predicts. But the new compensation plan means a new marching order for the firm’s advisors, he said.
“I think what they’re saying here is don’t rely on that as your main constituency. Your compensation will not be there,” Pirker said. “Advisors might choose to do so, but you can’t make a living off that if that’s your plan.”
Merrill Lynch is uniquely positioned to implement this plan because it has the Merrill Edge advisory business, which is operated out of the bank side, Pirker said. Merrill Lynch financial advisors have the opportunity to recommend clients to Merrill Edge, and take them back once their assets grow. Other firms, such as Wells Fargo, might have too many clients falling in the lower category to implement such a threshold, Pirker said.
“Merrill has the luxury of making that move, and that’s the reason why a Merrill broker has a larger book than at other firms,” Pirker said.
One recruiter, who spoke with On Wall Street on background because of a continued business relationship with Merrill Lynch, said the new threshold likely points to John Thiel’s new leadership position as head of U.S. wealth management. Thiel was promoted to also serve in that new post in April in addition to his leadership position over the firm’s Private Banking and Investment Group, where he helped boost that business’s profitability by setting thresholds focused on ultra high net worth clients.
This change to Merrill Lynch’s compensation, however, could affect a wider swath of advisors, the recruiter said.
Mindy Diamond, president and Chief Executive of Chester, N.J.-based recruiting and consulting firm Diamond Consultants said she anticipates the reaction to the new compensation structure will be mixed.
“The new comp plan is likely revenue neutral, and even an uptick for most, but for some it’s not,” Diamond said.
The new threshold for accounts could negatively affect advisors in rural and small markets, where there are less high net worth clients, Diamond said, as well as senior advisors working on succession plans to bring along younger advisors to ultimately take over their business.
“I think advisors are feeling that these comp changes, particularly the ones related to household size, will be asking them to make decisions for their clients based on what’s not best for the client, rather how the advisor will get paid most,” Diamond said. “For many, that just feels abrasive.”
Other changes in Merrill Lynch’s 2012 compensation grids include lower payout rates for producers falling in the lowest categories, who account for the production range falling at $299,000 and below.
Merrill Lynch has also added a new team grid award, and is formally rolling out a new program called Optimal Practice Model to help advisors identify best practices to boost their business. That program was previously piloted throughout 2011.
“We continue to make significant investments in tools and capabilities for our financial advisors, and more importantly, in their training and development to support their efforts to provide the best client service and expand their business,” Merrill Lynch’s spokeswoman said.
Lorie Konish writes for On Wall Street.
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