JANUARY 22, 2010, 3:41 P.M. ET.BROKER'S WORLD: Wells Fargo Advisors Hit With Payroll Crisis
By Annie Gasparro
A DOW JONES NEWSWIRES COLUMN
NEW YORK (Dow Jones)--Wells Fargo & Co. (WFC) is throwing its legacy Wachovia Securities advisers for a loop, with payroll changes that went into effect this month.
The new system will automatically withhold 25% of brokers' commissions for taxes, regardless of their tax brackets. The flat rate will be in place until 2011 for the roughly 11,000 brokers who make up Wells Fargo Advisors, the firm's traditional brokerage channel.
Wells Fargo acquired Wachovia a year ago, and didn't have a large retail brokerage until then.
"When you work for a company that big, once they make a decision on how they are going to do payroll, they aren't going to give anyone special treatment," said Lawrence Staat, partner at the Chicago-based law firm SNSFE, P.C. "I guess that's one of those cultural changes everyone talked about when Wells Fargo bought them."
Teresa Dougherty, spokeswoman for Wells Fargo Advisors, said there is a difference in the way the two legacy payroll systems operated. She said those changes were communicated to advisers throughout the integration, and the firm is working on a solution for 2011.
But this year, many brokers will face lower take-home pay from withholding too much because of the flat 25% rate--a frustration that will likely affect advisers producing less than $500,000 annually.
The average Wells Fargo adviser is in the $400,000 production range. If affected, advisers won't receive their tax refund until 2011.
Wells Fargo is offering impacted advisers a one-year loan with 3% interest, as cash-flow assistance while their money is tied up.
Brokers in tax brackets higher than 25%, which likely includes $1 million-and-up producers, have to elect to withhold more money before each pay period, or else face government penalties for withholding too little.
Once a broker's take-home pay reaches $1 million, which would only be for the few $2 million-to-$3 million producers, the flat-rate tax withholding bumps up to 35% on the part over $1 million.
"This is an integration nightmare," said a legacy Wachovia broker in the Midwest. "People thought 4Front was bad, but that was nothing compared to this."
4Front is the bonus opportunity scrutinized by advisers when it was offered in lieu of a retention package.
This adviser, who produces more than $1 million annually, said he doesn't expect Wells Fargo to revamp its whole payroll system on account of brokers grumbling.
"Unfortunately, the tail doesn't wag the dog," he said.
Michael Meissner, a tax lawyer and partner at Squire, Sanders & Dempsey L.L.P., explained that businesses use this "supplemental withholding rate," the flat 25%, for irregular compensation, such as payment from stock options or bonuses.
"Sometimes a company will use this rate [for irregular compensation] because it's mechanically easier to use a flat 25% rate and not force payroll people to recalculate" everything, he said.
Financial advisers' pay falls in to the irregular compensation category because it varies month to month based on their production.
Under Wells Fargo's new system, advisers are paid a bi-weekly "draw," and their commission checks will be processed monthly.
The draw, which is used throughout the industry, is a guaranteed weekly salary that is paid in addition to, or more often against, brokers' commissions. The draw system is used by brokerages to avoid being forced to pay advisers overtime wages.
As a result of multiple class-action lawsuits where brokers at major firms demanded overtime pay under wage and hour laws, the Department of Labor's Wage and Hour Division concluded in November 2006 that financial advisers are exempt from receiving overtime pay as long as they are paid a $445 guaranteed weekly salary minimum. Hence, the draw.
Brokers at Bank of America Corp.'s (BAC) Merrill Lynch and Morgan Stanley Smith Barney (MS) are also being moved on to new payroll systems as a result of recent mergers and acquisitions. They receive a draw and commissions, but they will not be hit with the flat 25% tax withholding.
A Morgan Stanley Smith Barney adviser in the South said he has adjusted to his new pay schedule, and as long as brokers have budgeted their cash flow well, they shouldn't have a problem with the Wells Fargo schedule.
"As a financial adviser, you shouldn't be living paycheck to paycheck, because you never know when those commissions are going to hit your bank account," the adviser said. "It's like manna from the heavens."
(Brett Philbin contributed to this article.)
(Annie Gasparro writes about financial advisers and their jobs, with a focus on the challenges brokers face as the industry moves from traditional stock brokerage to high-net-worth wealth management. She can be reached at 212-416-2244 or by email at email@example.com.)
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