The pay of financial advisers in the U.S. – the wealth management professionals previously known as stockbrokers – is not straightforward. Instead, it's a complex network of bonuses and salaries, predominantly determined by the amount of client assets they manage and the firm they work for.
As a result, adviser earnings are quite varied. Some are paid via a grid model, which is AUM-based and highly variable but has no cap, while others – in particular relationship managers in the private banking space – earn a base salary plus a bonus, just like in other areas of banking.
With a salary and bonus there's a more predictable income, but your earning potential is much less, with even the most successful professionals capping out around $2m or as much as $2.5m in total annual compensation, according to Jeffrey Bischoff, the president and founder of Old Greenwich Consultants, a headhunter focused on the private wealth management sector.
If you're on the grid model, in theory, your earnings are directly tied to your performance and therefore unlimited, he said. Advisers typically charge clients a fee anywhere from 1% to 1.5% on assets under management.
In practice, at the wirehouses and other major broker-dealers, experienced advisers can generate more than $1m in gross commissions and fees annually and net more than 40% of that amount, according to Mark Elzweig, the founder of the Mark Elzweig Company, an executive search consultancy. The higher amount of revenue you bring in, the higher percentage you’ll get.
For example, if you have $100m of client assets under management and you bring in revenue of $1m, the rule of thumb is that you’d make 40% of that – $400k – but that can range between 35% to 40%, so most million-dollar producers are taking home at least $350k. That said, if you bring in only, say, 0.7% of AUM, you’re creating $700k of revenue, so you’d be making closer to $250k.
Advisers would probably have to bring in at least $1.5m of revenue to get a 45%, which would mean they’d take home $675k.
You have to start small, though. Trainees at Morgan Stanley, Bank of America Merrill Lynch, UBS and Wells Fargo Advisors are likely to make somewhere in the $50k-$75k range. And two out of every three new recruits don’t make it.
Of those that do – junior advisers with three-to-five years of experience – are likely to earn between $100k and $150k.
“If they’re in the top decile, doing extremely well, maybe they’ll make $200k,” Bischoff said.
Successful advisers with five-to-10 years of experience can earn in excess of $300k. A decade or more in, hockey-stick growth in take-home pay is not unheard of.
“I know at least 100 people who make more than $2m, at least 25 [grid-paid advisers] that earn at least $5m, and a few that make $10m or more,” Bischoff said. “The benefit of the grid-paid model is that there’s no cap.”
Locking in experienced wealth managers
While there's a sink-or-swim initiation process for entry-level advisers, wealth management firms put a lot of effort into ensuring that top performers are locked in, particularly within the larger firms.
In early 1990s, the largest wealth management firms typically offered 25% of the gross value of a successful adviser’s book of business, give or take, which tended to involve a commitment to remain at the firm for at least three years, according to Bischoff. Times have changed.
“Now if you don’t get 300% [of annual gross revenue], you’re a slacker,” Bischoff says. “In 15 years, there’s been a twelve-fold increase.”
Those packages offering 300% of an adviser’s annual revenue now typically require a nine-year commitment, with some firms signing advisers to 12-year deals. Advisers who are big producers can typically get half of the recruitment package’s total value upfront, with the rest in deferred compensation, including back-end bonuses and incentives based on attaining performance benchmarks such as number of new clients and amount of assets raised.
In addition to recruitment packages, firms acquiring a competitor often have to pay retention packages to encourage advisers affiliated with the acquired firm to remain at the acquirer.
“Imagine paying 50 cents for every dollar [of revenue that advisers bring in] for recruitment and then having to pay retention packages on top of that,” Bischoff says.
To protect their considerable investment, firms require advisers to stay for the full length of the contract or pay back some of the signing bonus if they leave. In addition, much of the deferred compensation is tied to particular outcomes.
“A lot of the deals require advisers to reach a particular sales level to get all of the payouts,” says Andy Tasnady, managing partner of Tasnady & Associates, a strategic consultancy specializing in compensation. “Advisers have to continue to grow their book of business and achieve results to get backend payouts, hitting certain targets that the firm sets.
“Many firms provide incentives based on bringing in assets to reward people for bringing more of their clients over,” he said. “Advisers probably have to bring between 75% and 85% of assets over to the new firm initially, then there are different targets for different years.
“For example, by year two, the adviser might have to hit 100% or 110% by year three or 125% or so by year four or five.”
The impact on wealth management compensation of the Department of Labor's fiduciary rule
As a result of the DOL fiduciary rule going into effect in April (unless President Trump’s new DOL head reverses course), wealth management recruiting deals have changed dramatically.
The compensation levels that the wirehouses and other wealth management firms pay typically do not switch much year-to-year, but there have been recent developments with sign-on offers and deals due to the DOL’s fourth-quarter announcements and clarifications for their new set of rules and guidelines that involve financial advisers.
The easiest way to summarize the new principles is to say, no assets and revenues derived from retirement accounts can be used to calculate back-end recruiting incentives, because the DOL has determined that poses a potential conflict of interest.
As a result, one of the Big 4 wirehouses has gone from a potential 340% [of annual gross revenue] deal to a 250% capped deal, according to Jeffrey Bischoff, the president and founder of Old Greenwich Consultants, a headhunter focused on the private wealth management sector. They are all still paying 150% up front for top teams, and even as high as 175%, but back-ends have shrunk, for now.
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