Merrill Lynch has changed the way it pays its brokers to include more deferred compensation and less cash. The new package rewards brokers who stay a long time, while penalizing those that don’t. Its aim is reducing turnover, but may also improve the firm’s earnings.
Under the new plan, which was put into effect Jan. 1, retail brokers contribute 1 percent of their net pay to the firm’s deferred-stock plan, the Financial Advisor Capital Accumulation Award Plan. Merrill contributes 50 cents on the dollar to the plan, which vests over eight years. Merrill announced the plan over its internal broadcasting system in mid-December and again in an email to the private client group the first of the year.
However, brokers that leave before the eight years will lose not only the entire match, but their contribution as well. It’s an unusually long vesting period, but it’s losing the contribution that rankles some Merrill brokers. They are seeing it as a way of enriching Mother Merrill by taking money from brokers who put in as much as a solid seven years in the company.
“This is just a very simple way to add an extra $30 million to the bottom line of the private client group,” says one Merrill rep.
Danny Sarch of Leitner Sarch Consultants in White Plains, N.Y., agrees. He says: “It was a quick and easy way to squeeze a little more out of the private client group and make the earnings look better with the least amount of attention.”
Exactly how much money, if any, Merrill might make can’t be known now, but a significant amount of money is leaving brokers’ pockets at present. Merrill brokers bring in an average of $734,444 in revenues, according to the company, and, as they keep roughly 40 percent of the total, the 1 percent contribution of its 15,160 brokers comes to $44.7 million annually.
Some of it will never be returned. It is generally accepted that about 10 percent of brokers quit Wall Street firms after a year, and it’s likely that many brokers will not reach the eight-year mark, thereby forfeiting millions of dollars in compensation.
However, company officials were quick to defend its actions as a positive for its army of brokers. “It’s actually a compensation increase and not a reduction in payout rates,” says Jennifer Grigas, a spokesperson for Merrill’s retail brokerage arm. Grigas declined to elaborate on any further details of the pay changes.
While profits may be a factor in Merrill’s decision to make the change, there were other considerations as well.
“It’s a retention vehicle,” says Andrew Tasnady, a compensation consultant in Port Washington, N.Y., who works with broker/dealers in designing these deferred-comp plans. “It continues to shift the cost from people who leave to people who stay. Attrition rates are getting lower because of the effect of these deferred-compensation plans.” Firms have been increasing deferred-compensation levels for brokers in recent years in order to lower turnover rates. Tasnady also notes that the Merrill move helps align the interests of the shareholders with the firm’s financial advisors.
In an extremely competitive recruiting environment, firms continue to look for ways to hold on to their producers. Deferred-comp plans are just one of the ways firms can combat the hefty signing bonuses being doled out by rival shops. “The idea of retaining their best financial advisors is the main goal,” says one former Merrill branch manager. “It allows them to stabilize the sales force and create wealth through a forced savings plan.”
