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."
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; firstname.lastname@example.org
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