Lower-producing advisors under fire

That change could translate into some brokers seeing their annual income drop to roughly $70,000 from about $150,000.

“All of a sudden, the bus driver is making more than you and you’re taking a lot more risk,” says Charlie Spiring, chairman of the Investment Industry Association of Canada and senior vice president of Montreal-based National Bank Financial Ltd. (NBF). “You don’t have conventional hours and you have the risk of litigation. It’s not worth being a broker [at that kind of salary].”

But it’s not just the predicament of “lower” producers at TD Wealth PIA that’s raising eyebrows. The firm also has introduced new policies relating to the discounting of fees and advisors’ stock-option bonuses known as restricted stock units (RSUs). These changes could affect advisors’ take-home bonus regardless of their gross production level, as 40% of the bonus amount is based on hitting new targets. (The old RSU award was 100% based on production.)

To qualify for the first 20% of the bonus amount, an advisor now will have to hit a minimum of 16 closed client referrals a year. Previously, advisors were required to complete two referrals a month, regardless of whether they were closed.

A further 20% of the qualification requirement is now based on the advisor reducing the number of non-profitable households in his/her book. This would include households generating less than $1,000 in annual gross revenue. Advisors’ books now will have to hold 70% “profitable” households, by either increasing the activity of the lagging accounts or referring the stagnant accounts to another corporate partner firm, such as TD Canada Trust or a wealth partner.

Many TD Wealth PIA advisors have stock options that are deferred for at least three years — meaning their financial ties to the bank are stronger than some may think. Says Spiring: “Unless they have a competitor willing to offset the loss, [these advisors] aren’t going to be walking out the door.”

TD Wealth PIA is eliminating its registered-plan fee payout for 2014, which will cut $15-$35 per account for brokers. The firm says it has been successful with its RRSP penetration but there have been some “unintended outcomes” as a result. For example, 60% of the firm’s 18,000 single-account households are RRSPs and there is a “heavy concentration” of small and stagnant ones.

“You can no longer look at our grid and think that is what you will get paid,” says a TD Wealth PIA advisor in Ontario. “You can’t compare us to the rest of the banks because now we have so many moving parts that are all behind the scenes.”

Adds a TD Wealth PIA advisor in Western Canada: “It’s a bit sneaky of the bank because, for me, it is not represented as a reduction in my grid. But my compensation will certainly change because some of these targets are unattainable.”

Also on the table is a new fee-based household discount policy that came into effect Nov. 1. Previously, an advisor could discount a client fee without any repercussions. Now, for all new fee-based accounts, advisors who discount commissions below the firm’s recommended minimum will see their payout drop by 5%-15%. The confidential document says that the change is to encourage advisors to price their fees based on their value proposition and reduce discounting within their practices.

TD Wealth PIA has also boosted the minimum amount for advisors to discount a client commission for equities trades to $400 from $300 — also in hopes of reducing widespread equities discounting that’s happening at the firm.

“What they’re doing is punishing the advisor for doing [a] client a favour,” says a TD Wealth PIA advisor in Ontario. “At some point, if you have to charge the full price to clients, you are going to end up having a conversation with them about the discount brokerage, where the bank will make $9.99 on the trade. It doesn’t make sense.”

Dave Kelly, TD Wealth PIA’s president and national sales manager, declined to comment on the compensation changes.

Ongoing uncertainty in the investment community is persuading many clients to stay on the sidelines, Spiring says, and the resulting decline in revenue for brokerages conflicts with the need for higher profits.

“Most of the firms aren’t making their regular margins on wealth, and one of the ways to achieve that is to lower broker payouts,” Spiring says. “Is it fair if you’re a smaller broker? Of course not. But shareholders demand firms achieve regular margins. [And cutting payouts to the lower-end brokers] has become the easiest solution.

“Top-end brokers have a lot of loud voices and are desired all over the Street,” he adds. “Lower-end and medium-producing brokers are more vulnerable.”

Spiring has been advocating for banks to rethink their options for widening their margins. At NBF, he has advised his team to consider dropping the level of gross production to $300,000 and start recruiting advi-sors who fall in the mid-tier category and who bring in “good-quality business.”

Spiring is worried that there will be fewer brokers at small and medium-sized firms in the future — and that doesn’t bode well in an industry in which the average broker’s age is already high: “One day, we’re going to need someone to take [the books of retiring brokers] over. I’d like to have a well-trained, medium-sized broker take it over rather than a rookie who [needs] time to learn.”

TD Wealth PIA is not alone in addressing lower-end producers. Last year, Toronto-based Canaccord Genuity Group Inc. eliminated 35 advisory teams that it labelled as “underperformers” from its total of 180 such teams. And Toronto-based Raymond James Ltd. cut its grid for advisors making less than $400,000. Still, Raymond James added a number of mid-tier levels for in-house advisors making $175,000-$400,000 to encourage an increase in production. The lowest tier (for $175,000 gross production) dropped to a payout of 15% from 20%.

“I really commend Raymond James on this model,” Spiring says, “because I think [it has] done a good job at starting to address the problem.”

Three years ago, Toronto-based ScotiaMcLeod Inc. followed a similar strategy, introducing a “developmental” grid for junior advisors to hit specific targets. The firm also changed its bonus compensation structure to move the focus from bank referrals and toward new external asset growth, says Hamish Angus, head of ScotiaMcLeod.

Both ScotiaMcLeod’s and NBF’s grids have minimum thresholds at the lower end of the scale to escape the lowest commissions — NBF’s threshold is $350,000; ScotiaMcLeod’s, $350,000-$375,000. In contrast, Toronto-based RBC Dominion Securities Inc.’s threshold is at the top end at $500,000.

TD Wealth PIA’s Drive to 100 report lists several key drivers for the investment dealer’s future, including evolving to be a “premium price” firm, encouraging productive and profitable behaviour among advi-sors, and attaining industry average pretax profit margin by the end of 2015 and industry-leading pretax profit margin two years later. Says the report: “We want your practices, on average over time, to grow faster and be more productive and more profitable than our competition.”

Dan Richards, founder and CEO of Toronto-based Clientinsights, believes increased regulatory oversight for financial advisors is one of the primary causes behind the brokerages’ desire to reduce expenses. “These are fixed costs, regardless of book size,” he says. “If you’re an advisor at a bank-owned firm and you’re producing at a threshold that the bank cuts the payouts on, they aren’t that interested in having you around.”

The commission cuts leave many affected brokers with a trio of options: accept the significant (about 50%) pay cut; move to a smaller firm with a higher payout grid; or become an associate on another advisor’s team at your existing firm. (Richards doesn’t believe the brokerages would want to move lower-producing advisors into bank branches.)

“You take your book,” Richards continues, “meld it onto the book of a bigger advisor and, if the payout is twice as high on that bigger producer, you’ve doubled the total payout. All firms want advi-sors to focus on bigger clients, and one way to do that is [by] having bigger teams.”

Unfortunately for many advi-sors at bank-owned dealers, the option of teaming up to hit targets is not allowed.

“It’s a missed opportunity, in my mind,” says Spiring, who had several mid-tier producers join forces when he was CEO of Winnipeg-based Wellington West Holdings Inc. “There are ways to make this strategy work. And, at Wellington West, it certainly helped us get the business.” [NBF acquired Wellington West in 2011.]

Instead, the new grids also could lead to bad trading decisions, says one bank-owned brokerage executive who asked not to be named. Advisors who may be close to hitting the next pay scale, the executive says, could start to display behaviour that’s not in the best interest of clients or the industry in order to reach that target.  IE