by Anthony Riotto
Anthony Riotto is the founding partner of Riotto-Jones & Company (www.riottojones.com), a New York-based, national wealth management, executive search, and consulting firm founded in 1982.
My brokerage clients tell me that it is increasingly difficult to attract client advisers from the same old talent pools. The war for brokers between mega brokerage firms fought with giant recruiting checks simply can't sustain the industry's growth. And so, some brokerage firms have asked me to help them attract private bankers from the private banks. Why not? Brokerage firms have been offering their retail clients outstanding products and service including fiduciary services, complicated wealth strategy solutions and customized credit capability along with their sophisticated investment management solutions.
When looking at the brokerage firms, private bankers have shown particular interest in the private wealth management or private client divisions within the brokerage firms. They tend to be more exclusive and cater to higher net worth clients. Private bankers often have securities licenses and certifications that most brokers do not, such as CFA, CFP, CPA, J.D., and masters in taxation, which are attractive to these groups. And the private wealth divisions tend to seek clients with a minimum of $2 million in assets-similar to the minimums at most private banks.
But here's the rub. While I've successfully identified and introduced a number of private bankers to brokerage branch managers, many of the recruiting deals don't get done. This is partly due to stubborn misconceptions about brokerage culture on the part of private bankers, and it is partly due to an inflexibility surrounding the way pay packages are structured on the part of brokerages.
Overcoming Negative Perceptions and Compensation Differences
Private bankers tend to think the brokerage model is about sales and product pushing, with pressure to get numbers up on the board. This is reinforced during the recruiting process, as the banker is likely to hear that success is measured monthly (12 new starts a year). Even mainstream advertising for retail brokerages tends to portray clients' long-term objectives as secondary, with the brokerage firm benefiting regardless of how well the client does.
Meanwhile, even though most retail brokers would argue otherwise, private bankers tend to think that retail brokerage houses don't take their fiduciary responsibility to clients as seriously as private banks do. (Of course, all this could change if the SEC extends a fiduciary standard to brokers some time in the next year or so, as it is authorized to do under Wall Street reform legislation recently passed in Congress.)
And finally, even when we overcome the negative perception issues, we are then confronted with the brokerage compensation model. The private bankers tended to be slotted into one of two categories: those with a book of clients and those without.
If the banker has the potential but feels uncomfortable guaranteeing revenue from a client book, he or she is considered a trainee and offered $75,000 to $100,000 declining unrecoverable draw against commission for about two years.
This formula is not appealing to the private bankers without a book, because they feel their experience, technical expertise, and extensive contacts are being discounted. They are being asked to make major changes to their lifestyle and assume the majority of the risk. Assuming the branch manager sees the individual's potential, the firm should be able to offer a hybrid compensation plan-a reasonable salary plus bonus-so that the risk would be shared.
If the private banker does have a book, the book is evaluated, discounted, and handicapped and a payout of one to two times revenue is offered with a formula for ongoing additional incentives based on revenue generated. Most contracts range between seven and nine years. While attractive to some, most bankers seem to prefer a smaller buyout of their book and a smaller incentive for new business in exchange for a reasonable base salary. This would help the banker ease into a brokerage business model. It might even cost the brokerage firms less to acquire the talent. Today, even private banks are willing to write a check for a book, plus pay a salary and incentives.
Branch managers often throw up their hands at such an idea, saying private bankers are risk averse, and hence they don't belong in the brokerage industry. But if that were the case, the private bankers wouldn't consider such moves in the first place. Such bankers are motivated by the higher incentives and the opportunity to take control of their destinies, but they want to take smaller risk and less drastic steps. First they need to prove to themselves that their book will follow, and in the process they need to be supported.
What Does This Mean for RIAs?
The same can be said for RIAs who want to hire private bankers: a hybrid compensation model must be created. In one placement at one of our larger RIA clients, we created a compensation model that we believe is attractive to bankers that could be adopted by brokerage firms.
This RIA client hired a private banker with 14 years in the business and $1.4 million in revenue with $175 million in client assets. They offered him a salary of $185,000, plus 25 percent to 30 percent incentive for new business and ongoing trailers. There was also a discretionary bonus to reinforce company values. Within the following two years, this balance is to be evaluated and based upon reaching designated revenue levels, with changes made reducing salary and increasing revenue-based commissions. Those incentives will be competitive with the commissions paid to brokers.
Smaller firms have been willing to provide lower base salary but even higher pay out for the first two years as assets are brought in the door.
There hasn't been a great deal of hiring yet, but I can see that changing. When the market picks up there will be a tremendous demand for client service talent with the sales and relationship management skills found with private bankers, brokerage firms, and RIAs. To be competitive, all firms need to be flexible and sensitive to meet the needs of all the talent available.
