It isn’t pretty right now for advisors. There’s the barrage of bad press over write-downs, surprise failures of “conservative” investments (auction rates, anyone?), regulatory investigations and lawsuits. Not surprisingly, the stock market looks like a liar’s polygraph line—with a decided downward slope bias. But perhaps, worst of all, financial-services stocks are in the toilet. Not only are most client-account values down—which means advisory fees are down—if you’re at a publicly-traded brokerage firm, your net worth has probably been sliced in half in about a year’s time. As brokerage stocks tank—Wall Street banks have all seen their stock prices fall 40 percent or more in the last six months—they’re clobbering the options in advisors’ retirement accounts.
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At least one firm is trying to compensate reps for some of the damage: Smith Barney is giving financial advisors new options in exchange for those that expired worthless. Details weren’t forthcoming, but the gist of the deal is this: Smith Barney reps will get half the number of worthless shares they had, and at a recent price, say, at about $25, according to Smith Barney reps who have information about the program. Today, Citigroup stock is trading at around $22, not far from a 10-year closing low of $19.69 that hit just two days ago, on March 10. (Citi shares are off by 55 percent from around $47 since last October.) Only financial advisors are receiving new options—not other Citigroup employees.
Will other firms follow? Spokespersons for Merrill Lynch, Wachovia and Morgan Stanley did not return phone calls requesting comment on whether their firms are offering something similar. UBS says it is not, but the others might. The huge drop in share prices guts the value of reps’ deferred compensation accounts, and, therefore, puts firms at risk of losing their best brokers. Brokerages know that big producers are more vulnerable to recruiting deals when their golden handcuffs are weakened, and have jacked up already outrageous sign-on bonuses to as much as 250 percent in the past six months, says Mindy Diamond of Diamond Consulting, a recruiting firm. “There’s tons of movement. And with deals at their peak, if you consider that brokers have big losses in the value of assets in deferred compensation, jumping to another firm is a viable wealth-replacement strategy,” says Diamond.
And advisors are feeling it. What makes it worse is that brokerages of big firms had stellar performance in 2007. It’s the investment banking and capital-markets groups that are suffering. One Merrill Lynch advisor tells a story of coming home one night in mid-January to her home in New York, opening the front door of her brownstone and announcing to her husband and teenage son, “We’ve lost forty-percent of our net worth today.” She says the timeframe was exaggerated—but not the figure. And it’s only gotten worse. That was back in January when Merrill stock was at $50—it’s now nearing $40. Asked if she knew anyone retiring or near retirement, she said, “No, they don’t usually say until a month beforehand. But if I [were retiring], I’d be scared.”
Of the five wirehouses, the ones with compensation plans that are most tied to their firm’s stock prices are Merrill Lynch, Morgan Stanley and Smith Barney. Wachovia defers money from brokers’ income but offers several investment options, much like a 401(k); UBS’ deferred plan is paid in cash. At Citigroup, the firm’s Capital Appreciation Plan (CAP) is a voluntary deferral program that allows reps to defer up to 25 percent of their income towards the purchase of Citi stock at a 25-percent discount. It then vests every two years. The company kicks in an additional percentage, which is forfeited if the rep leaves the firm. Between 2004 and 2007, when Citi stock hovered between $45 and $55, brokers whined about performance, but most still thought it was a good deal over the long term.
At Merrill, the firm’s FCAP plan, which is “incredibly complicated,” according to one producer, reps can receive as much as 13- to 15-percent bonuses, paid in a combination of cash and stock, for exceeding goals for production, asset growth and net new-client assets. The awards vest every eight years, according to reps. “So, if you’ve been in the business for at least 10 years, it should be your largest asset,” says one top producer, due to the compounding effect. Until recently, it was that broker’s biggest asset, but not anymore.
Recruiters say the actions of management, and the current state of things at all the firms, have shaken the trust of a lot of advisors. “Loyalty has taken a big hit across the board,” says Danny Sarch, a recruiter with Leitner Sarch Consultants. Recruiters do seem to agree that Merrill Lynch and Smith Barney, which have been the hardest firms to recruit from in the past, have some new chinks in their armor. One recruiter who wished to remain nameless said Smith Barney is getting hit hardest because of a perception that Citigroup is still in trouble, and, as he put it, “There’s no RAH-RAH-RAH coming from Vikram Pandit [Citi’s new CEO].” But the mood is similar everywhere.
“There’s definitely an element of ‘I have to get mine’ out there,” says Sarch, referring to the anger reps feel towards management for the apparent lack of risk management in the past year or more.