Bonuses offered by the U.S.’s biggest securities companies to recruit top brokers are reaching their loftiest levels since the financial crisis, and none of the big firms are retreating from the bidding war. The brokerage arms of banks such as Morgan Stanley, UBS AG, Wells Fargo & Co. and Bank of America are offering high-end U.S. brokers two to three times the commissions and fees they produced in the previous year, up from about one times those earnings previously.
The bonuses, which can approach $15million for some teams over several years, have steadily escalated and include perks such as prime parking spaces and the hiring of brokers’ sales assistants, recruiters say.
The bonuses reflect how eager big firms are to manage the assets of the very wealthy, who tend to be more loyal to their advisers than to the advisers’ firms.
In addition, fees from wealth management, as the brokerage business is known today, are dependable, while revenue streams from trading and investing are volatile and becoming less profitable under regulatory and market pressures.
The big companies also are eager to attract big brokers and assets at a time when investors are still fearful of investing and cutting down on trades. So despite the costs, big firms keep bidding up the pay.
‘Clearly they want the deals to go away, but no one can afford to make the first move and lose market share,’ said Alois Pirker, research director of Aite Group, a wealth management consulting firm in Boston.
The high payouts mean brokerages often won’t recoup their largesse for at least two years, and often more than five, according to brokerage executives who declined to be identified.
And if brokers who are sated on fat bonuses or uncomfortable with their new firm lose their sales zeal, the payback can extend years beyond that.
‘They should absolutely stop doing it, but nobody wants to give up their competitive advantage,’ said Pirker. ‘If they go cold turkey, they lose.’
Just two years ago, brokerage executives said they understood the folly and were going to end it.
‘I truly believe the industry is moving toward a more rational recruiting model,’ James Gorman, chief executive of Morgan Stanley and the former head of retail brokerage at Merrill Lynch, told investors in January 2010 after the company reported a 2009 loss of $960million.
But Morgan Stanley, the biggest broker, with more than 17,100 advisers, continues to compete. Rick Peterson, a recruiter in Houston, said he heard of a team of advisers leaving Merrill Lynch for Morgan Stanley in 2011 for a potential payout of about $25 million.
He declined to identify the team and spokespeople at Morgan Stanley and Merrill, which is owned by Bank of America, declined to comment.
UBS Wealth Management Americas has been particularly aggressive recently as it tries to recover from tax and other scandals of 2009 and 2010, recruiters said.
Its compensation costs last quarter totaled 91 per cent of its net income, compared with 65 percent for its wealth management businesses globally, according to company reports.
In at least one case, it last year dangled a bonus equivalent to 3.8 times the trailing 12-month revenue of one brokerage team, said Peterson. Spokespeople at UBS did not respond to several requests for comment.
Wells Fargo, for its part, said it is ‘committed to attracting top industry talent and we do aim to be competitive in our offers.
Most new advisers join because of ‘the culture of the firm’ and the strength of Wells Fargo’s name, said Erica Van Ross, a company spokeswoman.
Deals offered by big companies are variable but inevitably include an upfront signing bonus and a ‘loan’ made over several years that is forgiven if the broker stays productive and in place for seven to 11 years.
A typical high-end broker with a clean regulatory record who generates $1million of annual revenue and oversees about $150million of client assets generally gets an upfront cash payment of 1.25 to 1.50 times trailing 12-month revenue.
The multiple rises with stronger production and asset levels. The back-end bonus is tied to hitting asset-gathering goals that rise from about 70 per cent of what brokers oversaw at their old employer within the first year to 150 per cent within five years.
Like all advisers, they receive ongoing payouts for new business. Top brokers at companies such as Merrill, Morgan Stanley and UBS retain between 40 per cent and 50 per cent of the fees and commissions they produce, meaning a $2million producer gets a payout of $1million a year.
That is a pittance compared with the $235million that AR magazine calculated as the median income for the top 25 hedge fund managers in 2011, but retail advisers can count on a more consistent return than traders, whose pay gyrates dramatically from year to year. The top 25 hedge fund managers of 2010, for example took home $400million each.
Even up-and-coming brokers with less than five years of experience who are generating $500,000 of revenue can attract hefty bonus deals, said Peterson.
The bonuses persist because well-connected advisers have access to the assets of the very wealthy, the lifeblood of wealth management companies.
And while brokerage executives may grouse about what it takes to move an elite broker – only a few hundred migrate a year at the upper levels, according to recruiters – they remain confident that the bonuses will ultimately pay off.
‘Wealth management firms make the bulk of their profits on the top 10 per cent of their producers,’ said Steven Eckhaus, a compensation attorney at Katten Muchin Rosenman whose clients include brokers and top securities firm executives who receive bonuses much higher than retail brokers. ‘If the deals didn’t make economic sense, they wouldn’t do it.’