Under a new compensation structure implemented at the beginning of the year, advisors are paid a salary plus a quarterly discretionary bonus, marking a huge shift from being paid solely on commission.
“It’s upset everyone there,” said
But observers suspect that there are other reasons for the shift. Some say the desire to more closely align client and advisor interests may have prompted the change. Without commissions, the fear or perception that advisors are “spinning accounts” or suggesting products and services merely to increase their production is removed, noted
“Intuitively, it tells us that they’re interested in serving the customer in the right ways and removing the transactional focus to the holistic approach,” Saltzman said.
In a statement,
The move may also help resolve compensation issues that have long divided bankers and advisors, say industry observers. Advisors on commission often make more money than bankers who are paid a salary and a bonus. The disparity leads to a great deal of animosity and jealousy between the two groups and prevents them from working together productively.
“The resentment puts up barriers to the two organizations working together to refer business back and forth to each other,” said Cutler.
The reason for the switch may also have to do with the bottom line, Cutler added. “The wealth business is a good business. It’s a growing business, but the problem that many organizations have is it’s a costly business because you’re paying advisors a lot of the margin,” he said. By removing advisor commissions, which can be as high as 40% of production, banks can potentially increase the margin for their institutions, Cutler noted.
“My guess is that they will lose some of their best advisors since good advisors will always make more on commission than they will on the fixed cost of salary banks can afford to pay them,”
Many executives of other banks are considering similar moves, but they’re scared, according to Cutler. They fear that the “best-performing advisors will go someplace else where they can make more money” and “be left with the B-players,” Cutler said.
Many of these executives may be waiting to see how the move to a salary structure works out. “If everyone does this, great. If you’re the lone wolf out there, you’re going to scare everyone away,” Cutler said.
Advisors are loath to accept salaries because it goes against their nature, observers say. “A good financial advisor wants to be compensated in direct proportion to their results and therefore like to be on 100% commission,” said Rummage. Having a salary that’s dictated by the bank robs advisors of the control they need to thrive, Rummage explained. “Advisors like to control their destiny. They don’t like it to be controlled for them,” Rummage said.
Advisors are also concerned that they will have problems finding jobs if they leave. They fear that firms won’t want to hire someone on salary because most firms hire people based on their production.
Losing advisors is not the only risk of switching advisors to a “salary-and-bonus” compensation structure. Recruiting also becomes a challenge, particularly with competition for top talent being so fierce. “The challenge of moving away from that [commissions] and being able to retain and recruit is significant,” said
Observers speculate that
Others, however, think otherwise. Most of HSBC’s advisors started aggressively looking around for other opportunities when the decision came out, Rummage noted.
“I’m sure they’re already running for the exits,” added Stathis.
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