Changes to Smith Barney Grid

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panther11578's picture
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Smith Barney To Cut Commissions For Low-Revenue Brokers
   

11-16-05 10:31 AM EST
NEW YORK -(Dow Jones)- Citigroup Inc.'s (C) Smith Barney unit plans to slash commissions for low-revenue brokers in a move to stem rising expenditures and weed out underperformers.

The new pay structure, announced internally last month, will lower commissions by three to five percentage points effective January for two classes of brokers: those who have been at the firm for six to eight years with less than $250,000 12-month gross revenue, and brokers with more than nine years of service who produced less than $300,000 in the past year.

"Smith Barney wants you to be doing half a million or more," said Alan Johnson, managing director of Johnson Associates, a compensation consulting firm in New York. "Either you produce, or you should probably look somewhere else."

The average production by Smith Barney financial consultants grew to $470,000 in 2005, according to the internal announcement, which was addressed to all branch managers. In 2004, average production stood between $440,000 to $445,000.

The cuts are expected to help Smith Barney recoup its rising expenditures, particularly next year, when it will start reimbursing brokers for up to $5,000 of the cost of earning the certified financial planner designation.

"As our business has grown, so have our investments and expenses," the internal announcement said. "In light of this, we will be modifying our grid payout for FCs in these categories."

Below Rivals

Under the new payout scheme, commission for six to eight-year Smith Barney brokers will be 30% if they gross $200,000 to $250,000 in production, 29% for those who produce $175,000 to $200,000, 27% for $150,000 to $175,000, and 20% for under $125,000.

The commission for Smith Barney brokers with more than nine years' tenure will be 33% for $250,000 to $300,000 producers, 29.5% for $200,000 to $250,000, 27% for $175,000 to $200,000, 25% for $150,000 to $175,000, 21% for $125,000 to $ 150,000, and 20% for below $125,000.

"Smith Barney has one of the most attractive comp plans in the industry, and changes are made with a consistent focus on attracting, developing and retaining the best financial advisors," said a spokeswoman who confirmed the new rates.

She declined to say how many of Smith Barney's 12,100 financial consultants will be affected.

The rates are higher than those at Legg Mason Inc. (LM), whose 1,300 brokers Citigroup is to acquire in a deal that is to close in December. But Smith Barney's deal for brokers with more than six years at the firm and less than $ 300,000 in gross revenue stands lower than its major rivals.

Wachovia Corp.'s (WB) Wachovia Securities, which absorbed Prudential Financial in 2003, pays brokers 20% commission for the first $9,000 monthly gross revenue and 50% for the rest regardless of the length of stay, said a firm spokesman.

Merrill Lynch & Co. (MER), which reduced its minimum production level this year to $150,000 for six- to nine-year brokers and to $200,000 for Merrill veterans with more than 10 years of service, gives them an average of 39% and 41% commission, respectively.

The commission for both grids could be lower or higher, depending on the business mix, said a Merrill spokeswoman.

A Smith Barney executive said the new pay structure will affect only a marginal number of brokers, many of whom need to generate only around $5,000 more to be excluded from the affected categories.

"FCs will have the opportunity to exceed grid levels throughout 2006," said the executive. "If an FC exceeds the grid level at any point in '06, they will get a retroactive payout at the higher rate back to the first of the year."

Bigger Is Better

For the past five years, compensation consultant Johnson said Wall Street firms have been taking a hard look and pruning out underperformers by lowering their pay system or by laying them off.

In August, Morgan Stanley (MWD) reduced its broker force by about 1,000 to around 9,000 financial consultants. Chief Executive John Mack said he wants to shore up productivity by targeting more affluent clients.

Merrill Lynch, which has more than 14,000 brokers, aims to bulk up its broker force with advisors that bring in about $500,000 of fees and commissions annually.

In an environment where bigger clients are better, the message is simple, says Johnson: "If you have smaller clients, you're better off in a different firm."

-By Evelyn Juan, Dow Jones Newswires; 201-938-2312; evelyn.juan@dowjones.com

(END) Dow Jones Newswires

11-16-051031ET

Copyright (c) 2005 Dow Jones & Company, Inc.

Copyright (C) 2005 Dow Jones & Company, Inc. All Rights Reserved.

blarmston's picture
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"The average production by Smith Barney financial consultants grew to $470,000 in 2005, according to the internal announcement, which was addressed to all branch managers. In 2004, average production stood between $440,000 to $445,000."
Wow, thats it? When compared to ML reps, who average around 700K, that's rather pathetic isnt it?

moneyadvisor's picture
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I strive to be a million dollar producer, like most ambitous new brokers. I understand why firms weed there sales force (the same reasons we weed our books). One thing bothers me......In the world of 1% , fee based business - how can an advisor be held to production levels, that are considered strong in a 4.5 % payout world?? You have management and the investment community pushing annuitization of your book, yet firms still want the same commissions as when guys were doing transactions..........You can't have it both ways.
The only thing I can  figure out, is they want fewer advisors......with monster books, and teams (not so much because this is a better service model for clients).  1) it's harder for a team to leave a firm, than one broker.  2) Having big brokers in a branch in any community, creates an allure to big money. I think firms want to help big MOFO brokers (ones they think are ethical, and truly represent the firm well), become monsters. When Monster advisor is at the best country club in town, on local boards, and involved in community organizations, he is going to create a presence in his absence........"hey skip....what does monster do???......Oh, he's a monster advisor at SB, has a team of 12, they manage multi million dollar accounts, and 401k's" .....Can you think of a better way to market the rich? The lower end advisor is easily replaced........give his book to monster, or monster wanna be. I guess the firms don't really care where the production comes from.......as long as it comes. And, monster can do the same, if not more production from slackers book, so.....what do we need slacker for???
All right then.....I guess I addressed my own question. I better get busy, if I want to be a monster!! I know a lot of people may not like this scenerio (and believe me, it does not make my life any easier), but if I were running a big firm, I would do the same. Survival of the fittest......most people settle in on mediocracy.......they just do.. Companies in this day and age, and in this business, will not tolerate it. Nor can they afford to.
 

Greenbacks's picture
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It just confirms everyones thoughts on wire houses. It is all about the firms profit and not what a rep gives to the client! They will continue this conflict of interest until it destroys them. I hope that it tarnishes-just there reputation and not the rest of us! 
Go Indy and let the bastards rot!   

moneyadvisor's picture
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In case some of you did not know........companies like Merrill and Smith Barney, are For Profit organizations. They deliver a service to the consumer for an agreed upon price, like most other businesess out there. Businesses that have to change and evolve, if they want to be IN business 20 years from now. Without "profit motive" you are not competitve, and will soon parish, or live a meager existence, (whether you are a company, or an individual). Why is that such a hard thing for some to understand, and accept?  

BrokerRecruit's picture
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The fact has always been that wirehouses want the higher producers.  They have the bar set at $x amount.  When a producer falls under that range, they become undesirable.  Most brokers within these firms know this and have come to expect it.  If you fall below these levels, there are plenty of firms that will accept a broker under the Merrill or SSB or whoever's standard.  It's the nature of the beast and if anyone is shocked by this, I'm amazed.

Greenbacks's picture
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There is a difference between Profit or Greed? Example Exon!

blarmston's picture
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Greenbacks,
Correct me if I am wrong, but isnt one of the main reasons that reps go indy ( other than working for yourself, you 'owning' your own book, etc)- is to receive a higher payout and MAKE MORE MONEY??????? That is greed at its fundamental level. This industry, and all of its participants, are all greedy to a certain extent.... It is what it is....

moneyadvisor's picture
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Blarm......did you slick your hair back today,....... are you wearing that horizontal blue striped shirt,.......and I bet you had the steak tar tar today. I know one thing......your still working Darien on the side.
 

troll's picture
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blarmston wrote:
Greenbacks,
Correct me if I am wrong, but isnt one of the main reasons that reps go indy ( other than working for yourself, you 'owning' your own book, etc)- is to receive a higher payout and MAKE MORE MONEY??????? That is greed at its fundamental level. This industry, and all of its participants, are all greedy to a certain extent.... It is what it is....

It's about far more than the money, mi amigo.
For example....I haven't been to a sales meeting in MONTHS, nor is there any on the calendar looking forward.
I haven't put on a monkey suit(i.e. suit and tie) in weeks, although I may have to do so one day next week.
And I don't have t to listen to any idiot product managers or sales managers with so called 'ideas' that are really just their efforts to fulfill their quotas and thus line their pockets.
The money is merely an additional benefit of being free and happy.
Someday maybe you'll understand. ;-)
Meanwhile, just toss a bagel chip for me on the way back from lunch on Monday, ok? ;-)

skeedaddy's picture
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Joined: 2005-06-16

Sounds like Merrill has the best package among the majors. Hmmmmm.......

rightway's picture
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Joined: 2004-12-02

If one cannot do $250K in 5 years, which on a fee based situation is
around $500,000 in new assets per month, they may want to re-consider
the business, or go Indy with no salary for start up.  At Merrill,
you bring in $500K per month in annuitized assets and you get FIRED for
failure to meet minimum goals.  Selfish Big Firm?  No- they
are LOOSING MONEY on you since they paid your salary for a couple of
years. 

Indy's forget that new reps are being paid $35 to $90K per year at ML
in salary plus an enhanced pay-out of over 50%.  ML expects alot
for that pay, as any employer would.  If you, as an Indy can pony
up that kind of salary along with full benefits and a $100K bonus if
your protoge' does well, and continue to carry your non-profitable
employee because of the goodness of your heart than cast your stone.
   Otherwise stifle yourselves.

I

blarmston's picture
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"Meanwhile, just toss a bagel chip for me on the way back from lunch on Monday, ok? ;-)"
JoeDaMan,
I would never think to toss a bagel bite at ya. In fact, I think the next time you're in So Cal we should belly up at the bar, pound some drinks, then go scoring for blondes...

troll's picture
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Greenbacks wrote:
It just confirms everyones thoughts on wire houses. It is all about the firms profit and not what a rep gives to the client! 
 
I have  no doubt that Greenbacks pays his office rent and feeds his family with "what he gives to the client". 
What mindless nonsense some people here speak...
 

troll's picture
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blarmston wrote:
Wow, thats it? When compared to ML reps, who average around 700K, that's rather pathetic isnt it?

I know you're speaking tongue-in-cheek, but it's time for a high school level stats class here. Look into the differences between the terms mean (average), median and mode. Then consider what a handful of very senior, very large producing brokers can do to the firm's average. I'm willing to be that you if exclude those monster producers and you'll find a great deal pf parity in production across the wirehouses. IOW, the mode isn’t all that dissimilar.  <?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
http://math.about.com/library/weekly/aa020502a.htm
 

Duke#1's picture
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Joined: 2004-12-06

blarmston wrote:
Greenbacks,
Correct me if I am wrong, but isnt one of the main reasons that reps go indy ( other than working for yourself, you 'owning' your own book, etc)- is to receive a higher payout and MAKE MORE MONEY??????? That is greed at its fundamental level. This industry, and all of its participants, are all greedy to a certain extent.... It is what it is....

Blarm, you can call it "greed" to go indy for more money, but I rather view it as gaining greater control over the revenue & expense side of the business. 
Merrill, UBS, Wachovia, etc. somewhat arbitrarily keep 60-65% of the revenue generated by their reps.  Only some of that 60% directly benefits the rep (an office, sales assistant, phone, postage, some company paid benefits, etc.), but much of that 60% goes for things that don't benefit the rep (salaries & bonuses for all the upstream levels of sales management, training programs for rookies, corporate airplanes & other overhead, recruiting packages, etc.).  And, much of the part that actually does benefit the rep (like office space & sales assistant) is a cost and choice that's not controllable by the rep.  If I'm a million $ rep at Merrill, do I really feel that I'm getting full value for the $600,000 I'm paying them?  Some might, many will not.
Indies, on the other hand, gain control over the finances to a great degree.  Instead of 60% going to the b/d at a wirehouse, a maximum of maybe 20% goes to it as an indy.  Out of that other 40% that would otherwise go to the wirehouse, the indy rep is making the decision re how they're going to spend their money on their business -- the b/d is not, as in a wirehouse.  Essentially an indy is pretty much ensured that 100% of their expenses (whatever they choose to spend) is directly benefitting their business.  If the indy manages their business well they're will be handsomely paid for their efforts.
So, Blarm, I view it as a cost/benefit issue of running a business, not "greed" as view it.
Regardless of all that, an irritation I've always had with the wirehouse grid system is that they're unfairly treating the larger producers.  If I'm a $300k producer at Merrill my payout may be as high as 40% if I have a totally annuitized business.  If I'm a $1.2 million producer (4 times as much production), my payout is only about 44% (I think that's about right), or only 10% more.  So the $300k guy is paying Merrill $180,000/yr (60%), while the $1.2 million guy is paying $672,000/yr (56%).  Yeah, the $1.2mm guy is getting a bigger office, a full assistant rather than sharing one, and maybe some trips, additional benefits, etc. the $300k rep isn't getting.  But, only a small fraction of that additional almost $500,000 a year the $1.2 mm guy is paying Merrill covers those exta bennies.  To me that's not being equitable to the rep.

moneyadvisor's picture
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Duke,
There are some variables that you, and the anti-wire type overlook. Yes, the hurdles are high and hard for new people at Merrill. I would agree, that if you cannot do $250,000 in 5 years, it is a clear indication that you probably won't do much more than $250,000 any time after that. As most would agree, It's just not worth it to the firm to keep that person around. It's not arrogance or a superiority complex. There is a lot of cost per advisor. Why would a company keep a $250k guy, when they could fill that spot with a more profitable producer. The 1.2 million dollar guy,....... is well rewarded in ways that far surpass the negligable difference in your example.

Duke#1's picture
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Moneyadvisor, forgive me since it's late on friday & I'm a little foggy right now, but I don't quite follow your post as it relates to mine.  I was simply taking some issue with Blarmston's post re it's greed motivating one to be an indy, and then went on a soapbox that big wirehouse producers should get a better shake in their payouts.  (I'd agree w/ your point about $250k producers being low profit for a wirehouse & didn't even address that.)
In any event, I'm also a  bit confused by your last sentence -- what "negligble difference" are you referencing?
Again, excuse me for my confusion re your post!

Duke#1's picture
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PS:  Moneyadvisor, I'm not anti-wirehouse, believe it or not.  Been there done that.  I'm just pro-indy for those that can do it and have an inclination to do it.   There are all sorts of reasons why many reps should appropriately stay employed at a wirehouse.  The only "anti" part I intended was just how I feel that wirehouse grids are not equitable for larger producers.  But, that's their decision and something that their reps understand going in.  It has just never made sense to me how wirehouses can get away with that.

blarmston's picture
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Joined: 2005-02-26

Good stuff boys and girls.... ow everyone enjoy the weekend and forget about the office for the next 2.5 days.

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