Standing still is no longer an option for Merrill Lynch advisors.
Under the firm's new compensation plan, Merrill Lynch is putting in place strong incentives for advisors to grow their practices ― and penalties for those who fail to do so.
In an additional effort to boost the firm's bottom line, Merrill Lynch is shifting some broker comp from cash pay to deferred while also strengthening incentives for advisors to retire at Merrill Lynch rather than move to a competing firm.
Merrill Lynch's nearly 15,000 advisors can now earn an extra 1% pay increase for notching 5% growth in net new assets based on the prior year-end assets (there's a maximum hurdle of $15 million). Advisors could earn another 1% boost for adding new clients, specifically either at least five affluent households ($250,000 and up) or at least two ultrahigh-net-worth households ($10 million and up).
Should advisors fall too far short of those goals (below 2.5% growth in net new assets and less than three affluent households or less than one UHNW household), they could see a 2% pay cut.
The bonuses and penalties apply to a broker's cash payout.
"I think they upped the ante in trying to do something bolder that will get greater attention on growth," says Andy Tasnady, a compensation consultant.
Tasnady says the incentives and penalties may act as a stronger nudge for advisors. For example, older brokers who have comfortably-sized books of business may not feel emboldened to go out and aggressively prospect for new clients.
"Too often these growth bonuses end up going to people who are already growing," Tasnady says.
But there's a catch with Merrill's new award, which is product neutral.
Advisors are only eligible for the growth award if they meet the firm's requirement of referring two clients to other Bank of America business lines. Failing to meet the referral quota will also render an advisor ineligible for the team grid award and recognition trips.
The referral does not have to result in business. Merrill Lynch also removed a penalty previously associated with that requirement.
"This plan aims to reinforce the entrepreneurial spirit that animates each of you ― boosting us collectively to achieve the kind of growth that is possible," Merrill Lynch head Andy Sieg said in a memo to advisors.
Merrill Lynch is also making two tweaks to its compensation grid. First, the firm is decreasing cash payouts by 100 basis points and increasing deferred comp by an equal amount.
Second, low-producing advisors will see a pay increase. Brokers generating $250,000 or less in annual revenue will see their payout jump to 34% from 20%. Brokers with between $250,000 and $349,000 in annual production will get a 35% payout, up from 25%.
The new growth award and other changes likely won't shock Merrill advisors, says Alois Pirker, research director at Aite Group.
"It's consistent with the direction the wirehouses have taken. It rewards high-performing teams and those bringing in new assets," he says.
The wirehouses are increasingly places where advisors need to boost their practices, he adds.
"The message it might also send is that if you [are not]wanting to grow, then maybe it's not the best place to be," Pirker says, noting the penalties advisors could face.
Merrill Lynch was the second wirehouse to unveil its compensation plan. UBS went first, making no changes to its 2018 plan. For the 2017 plan, UBS had drastically simplified it from more complex versions; the brochure explaining broker pay dropped to eight pages from more than 30.
Merrill's new comp plan also arrives at a moment of flux for the industry. Firms are facing fresh competition from robo advisors; the advisor ranks are aging, adding greater urgency to succession planning; and the industry has been roiled by the Department of Labor's fiduciary rule, which was partially implemented in June.
Meanwhile, Morgan Stanley, Merrill Lynch and UBS have cut back on recruiting efforts. And earlier this month, Morgan Stanley went a step further and left the Broker Protocol, a 2004 accord that permits advisors to take certain client contact information with them when switching firms.
Merrill Lynch has previously declined to say whether it would stay in the protocol.
The firm's compensation changes will help Merrill adjust to some of the trends buffeting the industry. For example, on succession planning, the company is increasing its payout to retiring advisors. They can now earn a payout up to 240% stretched over five years. The payout was previously set at a maximum of 200% over four years. It's based on an advisor production, length of service and other factors.
"The design of our 2018 plan is intentional: to align incentives with growth behaviors, and to encourage performance with thresholds set at levels that can benefit every advisor," Sieg said.