Investment advisors at most bank-owned brokerages aren’t as enthusiastic about their compensation as their counterparts at the independent firms. What gives the latter the edge? Simplicity itself.
Management at the top-ranking firms in Investment Executive‘s 2005 Brokerage Report Card say the secret of their success is straightforward: a simple grid.
“There’s a very simple one-way compensation grid,” says Terry Hetherington, national sales manager at Toronto-based Raymond James Ltd., “and when I refer to it as ‘one-way,’ that means that there’s no adverse selection created by paying the advisors different percentage levels of compensation based on the size of the ticket.”
It is not so basic at the bank-owned firms.
Hamish Angus, managing director at Toronto-based ScotiaMcLeod, calls his firm’s a “progressive grid” in which the more an advisor produces, the higher the payout. “It’s probably the same as [at] other brokerages,” he says.
It isn’t the same as most of the non-bank-owned firms, however. At Vancouver-based Canaccord Capital Inc., there is a 50% payout for all advisors on all
transactions.
Wellington West Capital Inc.‘s payout is likewise straightforward. Once an advisor has more than $300,000 in annual gross revenue, the Winnipeg-based firm pays 55% on transaction-based business and 60% on fee-based business. Those with annual revenue less than $300,000 get 45% payout on both.
Because Raymond James offers a choice of business models — the traditional branch network or the independent agent model — it has two compensation models.
Independent agents receive 85% payout but pay all their own expenses. Those in the branch network get an average 52% payout, with the company shouldering the
expenses.
“We believe it is the best compensation grid in the industry,” Hetherington says.
Similar to Raymond James, Dundee Wealth Management Inc.‘s IDA platform — Toronto-based Dundee Securities Corp. —
has two compensation structures.
Corporate offices are run as a typical
brokerage operation; while on the independent platform, advisors are in a principal/agent relationship.
“[For those branch managers/ owners,] we have a high payout structure and tiering,” says CEO Don Charter. “We pay out to the branches and we let our independent branches decide their payout structure to the advisors. It can be different among branches.”
Edward Jones advisors scored their compensation markedly lower than the other top-ranked firms. Gary Reamey, head of Canadian operations at Edward Jones in Mississauga, Ont., maintains the brokerage’s business model affects the payout. Edward Jones covers all of its advisors’ expenses: office, computers, rent, utilities, a full-time administrative assistant, etc. That differs from “low-service” firms, says Reamey, in which an advisor might get an 85% payout but have to pay all his or her own expenses. Average net figures, Reamey says, would bring that closer to 38%-40%.
Reamey says his firm also offers other perks: bonuses based on the profitability of the advisor’s business; group RRSP contributions that vest immediately; eligibility for two “all expenses paid” vacations for advisor and spouse; and the potential to become a limited partner in the U.S. holding company.
The invitation to purchase a share in the LP — and the amount of the offering — depends on factors such as time with the company and performance. Each time an advisor qualifies, he or she can purchase another chunk. Upon retirement, advisors get annual payouts that are a percentage of their partnerships. For example, based on a payout rate of 20%, an advisor who retired with a US$200,000 LP in 2004 would get US$40,000 a year.
The invitation to equity can be a very powerful incentive. Top-rated Wellington West is 90%-owned by its advisors.
Chairman and co-CEO Charlie Spiring says that when an advisor comes on board, an amount of capital equal to 50% of his or her 12-month trailing gross is allocated to that advisor.
The bank-owned firms are trying to bring some element of that participation to their compensation packages. In November, ScotiaMcLeod introduced its “performance partnership plan,” which pays a yearend bonus to producers who have more than $500,000 in annual gross revenue or who achieve a minimum growth of $40,000 in year-over-year production.
“The payout is linked to ScotiaMcLeod’s profit level,” says Angus. “Advisors can choose, on an annual basis, to take cash or contribute to a three-year restricted stock unit.” Payouts range from 1.5% of overall production for smaller producers up to 8% for the largest producers — in a good year.
In a medium year, it could be less than that.