I was working on a column for the Washington Post on the IBGYBG Wall Street bonuses, when my partner Kevin Lane (the wizard behind the FusionIQ algorithms) pointed me to this article — Compensation 2011: Your definitive guide to advisor compensation across the industry — published at On Wall Street.

Its a little “inside baseball,” about compensation structures on Wall Street. It is not about the insane bonuses for the guys who blew up the world and bankrupted their firms, but rather about the regular boys and girls working in the trenches of finance.

Most of these folks finance people wear two hats: They are both sales people who get paid based on their sales production (either commissions or fees), as well as managing the assets under their care.

The chart that caught my eye was this comparison between wirehouse and regional compensation on a theoretical $1 million in production (Example: $75 million in assets at a 1.5% fee).

If you are curious as to what firms are paying the most to their employees, this is the chart for you:

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Source:
Compensation 2011: Your definitive guide to advisor compensation across the industry
Lee Conrad and Lorie Konish
March 1, 2011
http://www.onwallstreet.com/ows_issues/2011_3/compensation-2011-the-biggest-and-the-best-comp-plans-2671610-1.html

Category: Employment, Investing, Wages & Income

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10 Responses to “Rank & File Compensation on Wall Street”

  1. mbelardes says:

    BR you should break down what you mean by the “trenches of finance” if you are doing a big piece on “I’ll be gone. You’ll be gone.”

    I say that because this chart could be misinterpreted. I can tell that this chart is about stock brokers (or Financial Advisors as I guess is the new term). But many people don’t realize that this chart consists of the upper echelon of brokers and that a broker is not an investment banker who could literally make millions of dollars in a decade and then peace out. True brokers build a book over decades and are very much looking long term.

    I’m at one of the wirehouse firms listed above, and the guys at my office who would make it into the chart above are definitely not motivated by the “I’ll be gone. You’ll be gone.” mentality. The top brokers have 25+ years invested in their careers and established a lot of trust and confidence in their clients, which is what got them the half a billion in assets and therefore the hefty compensation.

    I should add, these top brokers also got crushed in the financial crisis in their equity compensation arrangements. These guys weren’t slinging mortgage derivatives like they were going out of style. In many ways, I would say the good and decent broker at these firms trying to do the right thing for their client had it the worst. The I-Banker rarely faced the individual investor but the brokers in the field had a lot to deal with and answer for on things they didn’t have any culpability in.

    Just a thought.

  2. Fitz says:

    Its hard for me to interpret this having never worked at one of these firms. But there are payouts/goals/bonuses on new business that must differ from the payout received on the first $75M of AUM right? This chart leads me to believe there’s a range of 48%-53% payout on AUM across the board. I assume there are tiered structures that are negotiated by advisor that trail off…so you bring in a $10M client and get 60% year one…that may trickle down to a lower flat rate by year 3 or 4?

  3. mbelardes

    Good point — I will do some research and get the hard numbers, but the percentages refer to how much of the fee charged clients the salesperson/employees keeps.

    Let’s do a hypothetical: A retail broker/RIA who after 7 years has $40 million AUM at 1.5% fee. His gross annual production for the firm is $600k (40m x 1.5%). Let’s say at that production, his payout is 30-40%. Of that $180-240k, he pays license fees around the country ($5-15k), ticket charges/execution costs ($2-10k), and a sales assistant ($30-60k).

    Net net, his gross salary to the IRS is $130-175k — much higher than the average wages in the country, but not exactly big bucks relative to the job.

  4. prismatic_prism says:

    On compensation and banks the great Chris Rea once wrote:

    And all the roads jam up with credit
    And there’s nothing you can do
    It’s all just bits of paper
    Flying away from you
    Look out world take a good look
    What comes down here
    You must learn this lesson fast
    And learn it well
    This ain’t no upwardly mobile freeway
    Oh no, this is the road to Hell

  5. rip says:

    I like the Chris Rea thing a lot. Think deeper.

  6. philipat says:

    It’s such a shame that other industries don’t see the need (Competitively driven or otherwise) to pay 50% of Gross Profits back to employees. Although shareholders might, prhaps, see that differently.

  7. philipat says:

    P.S. Why on earthe would anyone still pay a 1.5% annual fee when trades cost 7 Bucks online?

    “The hekp, the advice, the research” came the response. Right………………………;-)

  8. Fitz says:

    philipat

    Two words: behavioral finance. 1.5% sounds a little stiff (I admit) but yes…its for advice. Advice that will keep them from selling equities in March 2009. And keep them from plowing all their savings into Janus Twenty in 1999 or into this great real estate deal in 2006. I would argue that good advice would pay for this type of annual fee 10 times over in the long run. People are emotional about their money and as a result make really bad decisions. Note: the advice needs to be good and not just go along with what the client wants in order to make a commission or hit some sales quota!

  9. Marc P says:

    @Fitz:

    Yeah, I suppose. OTOH, let me play devil’s advocate and take the opposing view.

    We have brokerage houses that consistently say they hold no fiduciary duties to their customers. They say that their duties are no greater than those of a used car salesman (i.e., no fraud and merely “suitability”). Brokerage houses appear to be happy to trade against their clients. Everyone remembers buy ratings and brokers pushing stocks while the analysts laughed about the companies being crap or the suckers taking the advice. Or cynical brokers advising whatever their firms told them to recommend or whatever gained the highest commission.

    Customers got shellacked in the 2008 crash and all the brokers could say was “Gee, sorry” for spectacularly bad advice. Then brokers waited until after their customers bitched and moaned — waited until their customers realized that nearly all the brokers were the same so they really didn’t have much choice.

    Undoubtedly there are fantastic advisers who put their client’s interests first. However those folks seem to be very difficult to find and have very high minimum account requirements.

    The industry has been rotting from within for 25 years. The public is just now learning the extent. The industry is doing its best to ignore the problem as top brokerage management loves this state of affairs. Top management knows that if the American investor loses faith in the market or in the brokerage firms in 10 years, well, as they say, IBGYBG.

  10. Fitz says:

    @Mark P:

    You are hitting on the good stuff now. I can’t disagree because you are describing what I view as a typical brokerage firm experience. Fiduciary duty vs. suitability is a huge issue and I don’t think the broad investing public fully understands it. I think its b/c Mr. Client doesn’t invest with Broker Bob b/c he has a fiduciary obligation, good investment acumen, aligned incentive comp and access to great investment managers. They invest with him because they go to church together, they golf together, he coaches their son’s baseball team, etc. They trust him regardless of the firm structure.

    You are right about good advisors being hard to find and carry high mins. To really execute the right investment model it takes a high degree of customer service and infrastructure for planning, research, back office, etc. This makes it difficult to execute profitably for small accounts. Its harder to add value for a client if you are mass producing material and recommendations for thousands of $50k accounts.

    But clients carry some responsibility as well. If a client agrees to take equity risk and is upset b/c their equities were -40% in 2008 then they are to blame…not the advisor. The old Buffet saying about if you can’t stand a 50% decline in equities… Some clients have unreasonable expectations and should be educated up front on the risks. What I’ve found is that what most clients describe up front as their risk tolerance looks A LOT different when its actually playing out in their portfolios as the market sinks.