Main Street may be smitten with online trading and a brokerless existence, but Wall Street firms still are paying up to steal brokers -- human ones, that is -- from competitors.
Morgan Stanley Dean Witter
and the other wirehouses -- national brokerage firms with more than 6,000 brokers -- are pushing hard to recruit brokers in the hope of securing more assets and the stable, recurring fees that come with them. Online brokers, by comparison, care much less about assets at this point in their evolution. They profit mostly from their trading commissions, which are significantly lower than those full-service firms charge.
The desire to grab as much human capital as possible is showing up in the little-known world of brokerage recruiting, where bonuses can now reach up to 100% of a broker's previous 12-month commissions, up from 40% to 50% in the early '90s.
"It's the almighty demand for assets," says Rick Peterson, the head of Houston-based recruiting firm
Rick Peterson and Associates
. "Production is still important, but if firms can capture the asset base, they really don't care much about the actual broker."
In the days before online brokers and asset-gathering models, the value of a broker was measured by his production, or the amount of gross commissions he generated for the firm. That production was worth something to other brokerages, which would pay a percentage of it in bonuses to steal brokers -- called "producers" in industry parlance -- from the competition.
The recruiting bonus, the so-called front money, was based on a percentage of that gross and paid in the form of a forgivable loan. Wall Street firms haven't stopped stealing from each other, but they've forsaken production for the bigger and safer bounty of recurring fees from assets under management.
Merrill Lynch began that movement years ago, but it and the other wirehouses were slow to change the basis for brokers' pay. Now, however, the liability and instability of the commission-based business has them focused squarely on the asset-gathering model, which gives them recurring fees.
"Production is dead, in a sense, to the wirehouses," says Richard Zander, the head of the Lake Tahoe, Nev.-based
recruiting firm. "If you have a broker with $400,000 in production and $6 million or $8 million in assets, the big firms don't want him. They want assets of $40 million on that kind of broker."
These days, Morgan Stanley Dean Witter is the most aggressive recruiter. Brokers who generate around $500,000 in commission and have $50 million in assets under management can get 30% in cash up front, 20% to 30% in salary over six to 12 months and the remaining portion if a certain amount of assets are transferred to their new firm over a specified period of time. The package locks a broker up for five years as well.
"It looks like a pretty rich deal to me," says one Merrill Lynch branch manager, who adds that Morgan Stanley has pursued some of his top brokers. In the past three months, this deal has attracted top brokers from Merrill and
, according to published reports. Morgan Stanley declined to comment.
Other firms are paying $1,000 for every $1 million new recruits have under management, with a cap anywhere between $50 million and $75 million.
In fact, pure assets have become valuable enough that
set the minimum balance on its new
account at a low $100,000. Pru charges an advisory fee on the account but lets clients pay just $24.95 per trade. The low minimum, according to a spokesman, is an effort to win back some assets that have been redirected to online and discount brokerages.
Pru could be trying to recapture those assets before online firms move to offer more fee-based products, a process that's already begun. "We want to provide an incentive to bring assets together in one account here," spokesman Charles Perkins says. "They can trade in a low-cost environment and still get the benefit of a broker."
The benefit to the broker, however, may be a little suspect. The management fees on such small accounts won't add up to much, and the $24.95 commission may not be enough to cover the country club membership.
That move goes against the conventional wisdom of giving up on small accounts in pursuit of the high-net-worth client, one with more than $500,000 in brokerage account assets. Merrill Lynch has made such a pursuit its Holy Grail, even releasing a study Monday that illustrates the growth and the need for financial advice of the international high-net-worth client base.
Brokers may be less enthusiastic about the way they're being paid because, at least initially, the firm is looking for assets and they're looking for a percentage of their gross, recruiter Zander says.
"I don't think the broker is dead. I think what we're going to see is a hybrid," he says. "What are the wirehouses training? They're training asset-gatherers."