Merrill Lynch brokers might want to consider this New Year's resolution for 2002: Convert more clients to fee accounts and shed households under $100,000.
The firm's new compensation package, distributed to producers Oct. 29 and effective in the new year, makes it abundantly clear that brokers who dump small households and build recurring revenue will be rewarded.
Depending on the rep's production level, the firm will pay from 35% to 50% on fee business for households with $100,000 or more in assets and liabilities, according to a copy of the 17-page plan obtained by RR.
A $500,000 producer, for example, can expect to receive a combined payout (cash plus deferred compensation) of 46% on fee business, which includes revenue from fee-based brokerage accounts, wrap fees and trails. Five percentage points of that payout would be deferred. That's up from a 35% cash payout under the old compensation plan that dates from 1999.
“I'm going to make out like a bandit,” says one East Coast broker whose revenue is 83% annuitized. “I'm getting a 20% pay raise.” A $600,000 producer in the Southwest whose business is 65% fee-based says the new package will put an extra $85,000 in his pocket. “The buzz around here is pretty positive,” adds a Merrill rep in the Midwest.
In meeting with reporters after the plan was unveiled, Bob Mulholland, head of Merrill's Client Relationship Group, said the firm is rewarding brokers who “combine more business with better business.”
The average Merrill broker has about 33% of his assets under management in fee accounts, according to a new Financial Advisor Handbook distributed along with the plan. The handbook shows reps how they can plan and track their progress on an internal Web site.
For small households, brokers at all production levels receive: 1) no payout on trades that generate less than $500 in commissions, 2) 25% on tickets of $500 or more, and 3) 35% on all fee business. These reduced payouts remain in effect whether the broker serves the small household himself or transfers the account to Merrill's call center.
Amid the cheers from producers who expect a windfall, at least one broker says the new package has a dark side. “You know who gets screwed in all this?” he asks. “The older brokers who are selling B shares and can't change their businesses as quickly as I can change mine.”
A producer with five years at the firm and less than $200,000 in production receives a 25% cash payout on all tickets over $100, and 35% on fee business, regardless of the size of the household. Ten-year vets must do $300,000 in production to avoid this penalty box.
Some Unexpected Twists
Merrill brokers discovered a few surprises in the new pay plan, including increased payout on large transactions, a new deferred “growth account,” and stock options for club-level producers.
Transactions — Cash payout on large transactions for $100,000-plus households jumps two to four percentage points from the old grid. Brokers no longer get a “haircut” when they discount trades (as long as ticket size holds up). Combined payout on $500-plus tickets for large households now ranges from 39% to 50%. “Transactions remain an important part of our business,” Mulholland said.
Deferred compensation — The firm has added a deferred payout of 4% to 6% that is incorporated into the grid, so even average producers benefit. And even $100 tickets written for $100,000 households qualify for a 4% deferred award. Deferred awards go into the firm's Financial Advisor Capital Accumulation Award Plan (FACAAP, made up of stock units) and a new “growth award” account, which vests in four years.
Merrill reps are enthusiastic about the growth account, which grows based on how much a rep grows his business (minimum 2%, maximum of 20%, annually). The firm says the average Merrill rep grows production 10% each year.
The vesting period for FACAAP has been shortened to eight years from 10, according to one broker on the East Coast. “They were losing brokers who wanted more cash in hand.”
Million-dollar producers will see 20% of their deferred compensation go into the WealthBuilder account (mutual funds/private equity that vests at retirement), and new for 2002, club-level producers get an extra 2% in the form of 10-year stock options that vest in three years.
Investment certificate — Merrill will continue offering a $100,000 certificate to brokers who join the firm, stay five years and meet performance and compliance requirements. Reps were required to also obtain the proprietary Certified Financial Manager designation or the CFP. Now, the CFA, ChFC or CIMA will qualify as well.
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