After news emerged this week that Merrill Lynch is changing its compensation regime for advisors, this publication takes another look.

News this week that Merrill Lynch is changing how advisors get rewarded shows how such organizations are fighting to retain star performers and resist competitive threats from rivals in a sector facing major change.

As reported here yesterday, the US wealth management powerhouse is introducing what is called a New Growth Grid Award program, which includes up to a +2 per cent grid increase incentive for the acquisition of new clients and net new asset and liability flows. Similarly, advisor grid rates can fall by up to -2 per cent if minimum hurdles are not met.

Depending on the level of annual sales, the payout percentage rises as the sales level rises. For example for the industry as a whole, an advisor cranking out $800,000 in production will earn 40 per cent of that – or $320,000 for the year. An advisor generating $1.0 million earns 41 per cent, and one earning $2 million earns 42 per cent. 

“They [Merrill Lynch] want to spur growth and hold onto advisors. They’re trying to get a wider group of the advisors to focus on growth,” Andrew Tasnady, of wealth firm Tasnady Associates, which is situated in the New York area, told this publication in a call. 

The Merrill Lynch approach (for the growth award) involves a shift to monthly compensation rather than an approach where the amount of the bonuses was paid at the end of the year, he explained.

With news pages replete with stories of advisors leaving wirehouses and larger firms to join RIAs and similar firms, Merrill Lynch is doing what it can to protect and grow its turf, Tasnady said. 

The wirehouse world is already coming to terms with last week’s decision by Morgan Stanley to pull out of a pan-industry “protocol” through which member firms promised not to sue in the event of staff defections. Morgan Stanley said that protocol had become increasingly abused, and no longer wished to be part of it. Another force at work is the Department of Labor Fiduciary Rule, which has come into force via stages and has the effect of encouraging advisors to move towards fee payments and away from a commission model more associated with transactional business. 

The step-up in percentage payments linked to higher production is clearly aimed at business growth, Tasnady said. 

The “sales” levels are the revenues (actually called “revenue credits”, or “production credits”) that are attributed to the individual advisor based on the actual revenues that are coming in to the firm from the asset fees and commission fees being generated, he continued.  

Credits from lending fees are also being put on the grid caculation nowadays as well. A client with $1.5million in assets that are in an annual fee type of arrangement of, say, 1.0n per cent fee (for the advice) would generate $10,000 a year in revenue and revenue credit for the advisor, Tasnady said. A transaction commission of say $150 for a stock purchase will also create “revenue credit”. These would all be added up; the advisor would get his/her 40 per cent or so (depending on their annual total revenue) times each of those individual revenue streams, he said.

Avoiding conflicts of interest
One change made is to avoid conflicts of interest, industry figures say. The way that the “grid” system works is agnostic in terms of products. Such conflicts were possible in the past when a broker had an incentive to recommend certain products. The new system does not give preference to one product over another. 

Merrill Lynch is making the arrangements more attractive for advisors who are retiring, and also reducing some of the pressure on younger advisors worried that initial performance might not meet with approval. Lowest-performing brokers – such as those trying to build a larger book of business, will see their pay go up next year. Merrill Lynch is removing the lowest rungs of its pay grid, meaning advisors who bring in under $350,000 in revenue will next year keep 34 per cent to 35 per cent. In 2017, those ranks earned between 20 per cent and 25 per cent.