When the nation’s economy spiraled down around 2008, the housing market and employment sector weren’t the only areas that were hammered.
Financial advisers also took it on the chin with shakeups in the way they are compensated that continue to this day.
Nearly half of all financial advisers are now paid on the basis of their production over the past six to 12 months, which is a notable change from what the data showed 16 years ago, according to the “Kehrer Saltzman Financial Advisor Incentive Plan Survey” on practices at financial institutions prepared by strategic management consulting firm Kehrer Saltzman & Associates.
“By comparison, in 1997, no credit union or bank reported using a trailing average of production to compute adviser pay. This change to a rolling average has reduced some of the volatility common in compensation plans that tied payout to each individual month’s production,” said Kenneth Kehrer, principal with Kehrer Saltzman in Charlotte, N.C.
The survey encompassed 40% of financial advisers working at banks nationwide. The survey also provided a side by side comparison of more than 30 different compensation plans currently being used by more than 20 financial institutions. “If you’re a firm and you’re trying to attract and retain advisers, and you’re paying compensation on a month to month basis, compensation will be more volatile,” said Steven Saltzman managing principal at KSA.
While there were no credit unions that participated in the survey, Saltzman said KSA is encouraging them to contribute for the research that will be released in 2014. In the meantime, credit unions still have a critical stake here.
“They, like any other institutions, need to compete and win good talent in the marketplace,” Saltzman said. “A core component of that is understanding what other compensation plans are available and predominant trends. It can also help them in terms of retention.”
The KSA survey showed that half of the firms had more than one plan in place, regardless of their asset size. The respondents tended to have reduced grid payouts, Saltzman said. With this type or arrangement, an adviser gets a percentage of the revenue, which can be high or low depending on how much revenue is coming.
Some advisers may choose not to get support from the bank and rely on referrals, which could potentially result in higher compensation. The caveat is advisers have to work harder in this regard to build their books, Saltzman pointed out. This latter option points to the fact that bank broker-dealers are competing more with wirehouses and other players.
Indeed, the 2008 financial crisis greatly impacted the U.S. wealth management industry, and advisers at wirehouse and registered investment advisory firms are now feeling the change, according to a report from Aite Group, “Wirehouse and Registered Investment Advisors: So Alike Yet So Different.”
While wirehouse and RIA segments at first glance differ significantly, the financial crisis turned the tables on these players, Aite found. The fragmented RIA segment has grown steadily in recent years, thanks to a flow of breakaway brokers from wirehouse firms, but the once-mighty wirehouses struggled to make it through the crisis intact.
Meanwhile, KSA said if the core objective of a credit union’s retail investment services business is to capture the investment business of its members, then the yardstick to measure success should be how well it penetrates that opportunity.
Credit unions can look for opportunities within member deposits or shares but that may be problematic in the current and recent deposit environment, according to KSA. Collectively, credit union member households contain $13 trillion in assets.