Rewriting the rules? The impact of UBS' comp changes
Analysts and industry insiders are divided as to whether UBS' revamped comp plan may spur rival firms to follow suit – and whether the wirehouse's changes will entice its advisers to stay put rather than go independent or accept recruiting bonuses to move elsewhere.
In addition to the scope of UBS' changes, the timing was also highly unusual – the wirehouses typically wait until December to unveil compensation plans, which are tweaked annually.
"I have not heard or seen in 25 years, any firm release [a plan] six months in advance," says Michael Maurer, a former Morgan Stanley manager and current CEO of Steward Partners, an independent firm affiliated with Raymond James.
"Will this make it harder to recruit people from UBS? At the high-end that is likely. But people will still move because there are a lot of reasons why people do that," says recruiter Elizabeth McCourt.
That gives advisers both at UBS and rival firms time to take in the details. UBS held a conference call with its advisers on Thursday morning, according to people familiar with the matter.
A UBS adviser, who asked not to be named because he did not have permission from management to discuss the comp plan, says he likes the changes, particularly how the wirehouse simplified broker pay.
"It makes it a lot easier for FAs to see how they are getting paid and you don't have to worry about what bonus you are missing out on because you didn't know about it or forgot about it," says the adviser, who does more than $2 million in annual production.
The firm's brochure explaining compensation dropped to eight pages from 34. By comparison, Morgan Stanley provided advisers with a nine page brochure. A spokeswoman from Bank of America declined to comment on the size of the firm's brochure. A Wells Fargo spokeswoman did not respond to request for comment.
Unlike the wirehouses, some regional firms rarely make changes to their compensation plans and make that transparency part of their pitch when recruiting wirehouse advisers, according to industry insiders. When Raymond James last altered its compensation plan for employee advisers, the firm announced the changes, which were slated for 2013, about six months in advance, according to a spokeswoman. She says “we gave significant notice because this was the first major change in nearly two decades.”
The UBS adviser says he could see how his firm could become a trend setter for the industry, noting that Merrill Lynch was long regarded as the industry's leader in establishing new practices. "It used to be that Merrill Lynch knew the way and other firms followed. They would piggyback on what Merrill Lynch was doing."
Industry analysts and observers are less sure that other firms will follow suit.
Alois Pirker, research director at Aite Group, says UBS' move – particularly the early nature of the release – sends a clear signal to the market.
"It could also be an early sign that things are changing from paying high recruiting bonuses to paying top producers better in order to hold them," he says "We've seen the sign-on bonuses move up. No one is happy about that. But everyone has to play the game. Maybe UBS is setting a new trend here, a new direction."
Read more: What's next for adviser pay?
Glenn Schorr, an analyst at Evercore, said in a research note on Thursday that changes at UBS could inspire advisers at other firms to ask for similar changes from their senior leadership.
"While we don’t expect it, UBS's new plan could potentially cause a ripple effect across the industry where the other major broker-dealers feel pressure from their FAs to follow suit, thus, pressuring margins and valuations," Schorr writes.
But while that impact is most likely to be felt at rival wirehouse firms, senior leadership may not follow UBS' lead, according to Schorr and other experts.
"Theoretically, the risk is that if competitors don't match, the competitors' highest producing FAs could look to move their books of business to UBS," he writes. "The reality is, with or without this new plan, any FA could have gotten a big payout (like 250%-300% of trailing 12-month commissions) to change firms before or after UBS’s plan so we view the UBS move as much more inwardly focused on their own retention and not really a designed competitive weapon."
Schorr adds that "our gut is competitors aren’t likely to follow suit," and cites the stated profit margin goals of Morgan Stanley and Bank of America Merrill Lynch as reasons why the wirehouse may be reluctant to raise their compensation expenses.
PUTTING THE BRAKES ON BREAKAWAYS?
Andy Tasnady, head of an eponymously-named compensation consulting firm, says that UBS' revamped plan may influence other firms to recalibrate some elements of their plans.
"A juicier incentive for retirement at the current firm should lighten the motivation a bit for 'monetizing my book,'" Tasnady says, adding that could further reduce attrition at UBS with regard to other firms recruiting away advisers and the movement to independence.
In recent years, firms like Dynasty and Focus Financial have built their businesses on helping wirehouse teams go independent. Sometimes these teams are quite large. Last year, Dynasty says it helped a team that managed $3.3 billion in client assets at Barclays form an independent firm, Summit Trail Advisers, in San Francisco.
Elizabeth McCourt, a recruiter and coach based in Westhampton Beach, N.Y., says it may be too early to tell whether or not the compensation changes will stem UBS' losses to other firms. With regard to wirehouse competitors, they may have to up their recruiting bonuses to get UBS advisers to move, she says.
Breakaway advisers – those going independent with firms such as Dynasty and Focus Financial Partners – are likely doing so for multiple reasons, McCourt says.
"Money is just one component and it may not be the first one if someone is going in an alternative direction. Will this make it harder to recruit people from UBS? At the high-end that is likely. But people will still move because there are a lot of reasons why people do that," she says.
Tasnady says that the Department of Labor's new fiduciary rule may play a bigger role in putting the brakes on the breakaway movement.
"I think the potential DoL impact would have a larger impact on reducing flow to independence, as they may face more unknowns on compliance and admin requirements on their own," he explains. "Also just the unknown future of DoL is enough to give pause for a bit until the reality clears up. Who wants to drive fast in the fog?"