Recruiter Roundtable: Times never have been better for a good deal -- if you have the motivation to move.

On Wall Street Magazine, March 2003

Each year, On Wall Street explores the latest developments in broker compensation and recruitment by gathering the industry's leading recruiters and compensation consultants for a roundtable discussion. Meeting with the OWS staff in New York late this past January were: Carrie Degenhardt, Schwartzkopf & Degenhardt Associates, New York; Mark Elzweig, Mark Elzweig Co., New York; Dennis Gallant, Cerulli Associates, Boston; Alan Johnson, Johnson Associates, New York; Michael King, Michael King Associates, New York; George McGough, Hadley Lockwood, New York; Dan Sarch, Leitner Sarch Consultants, White Plains, N.Y.; Andrew Tasnady, Tasnady & Associates, Port Washington, N.Y.; and Steve Testerman, Brokerhunter.com, Atlanta. Below is an edited transcript of their discussion.

OWS: In terms of recruitment activity and compensation, does 2003 appear to be shaping up better than last year?

KING: In my 35 years in the business, I don't remember a time when the deals have been as good overall as they are now. But whether brokers will leave is another issue. Most of them are afraid to move. They're worried about losing their books and their assets.

Most current deals are in the 100 percent range. UBS PaineWebber has come up with a very smart arrangement. They give you a certain amount of up-front, depending on production and assets. In your second year, you get 100 percent of whatever you do less what you previously got. Most brokers seem to like it. Some want the whole thing up front -- so do I. But it's a very clever way for the firm to protect itself while giving brokers an opportunity to achieve. Wachovia is basically doing the same deal.

The big change over the last three years is that the nature of the broker's production is as important as the number itself. Firms are concerned about assets and compliance. You can have a million-dollar book with few assets under management and no major firm will take you. It's not easy to go much above a 1 percent return on assets.

The other issue that's finally being addressed is handcuffs and deferred comp. If you are offered $500,000 and have to leave behind $500,000, how are you going to make that up? As time goes by, and more brokers are bound by handcuffs, it will be much more difficult for brokers to move and for us to help them move.

SARCH: The major trend I see is that all the major firms have made recruiting a major goal, which means that everybody is chasing the same talent. I agree with Michael [King] that the deals are good and that competition is very intense for the best people.

The level of due diligence is really extraordinary, and it is our job to prep candidates for it. If brokers measure up and are clean compliance-wise, they will get the best deal possible. But their book will be subjected to an amazing amount of attention; they can't be offended by that. I've had candidates who had to explain 20-year-old DWI convictions.

JOHNSON: On the compensation front, there continues to be huge downward pressure. A new phenomenon is to pay less for low producers and/or to terminate them. Wall Street traditionally starved out low producers. But now firms believe that from a compliance and overall cost perspective they are actually net losers if they hold on to low producers. All firms are aggressively getting rid of them. Of course, the definition of a low producer depends on the firm. At the major firms, it is probably $500,000 or less of production. If you are $350,000 or less, you probably are on the way out.

A final thought would be that there is a tremendous amount of uncertainty concerning the entire brokerage business model. With the continuing scandals and the mess in research, it's a little like the Wizard of Oz -- who's really behind the curtain for the business going forward? Truthfully, I don't think anyone really knows where it is going.

TESTERMAN: We represent 34,000 candidates, which is probably a microcosm of the registered people out there. Many of these candidates slide under what most of the people here deal with. In our forum, the under-$350,000 or the under-$100,000 broker can be matched up with jobs. And what we are seeing is that on the independent front and at some of the regionals, there is a pretty good demand for those being driven out of the wirehouses.

We recently did a survey in which we asked about 130 managers, recruiters and HR people what they saw coming for 2003. Nearly half said that they planned to hire more than twice as many people as they did last year. Last year was probably a pretty poor year to judge and barometer against, but at least there's a sense things look pretty positive.

GALLANT: At Cerulli, we don't really look at the exact compensation trends; we try to look at broker behavior and advisor behavior. We see a bit of an up-tick in the migration of advisors out of wirehouses into the independents. But I think the migration is short lived. Given the golden handcuffs and how strongly the wirehouses are thinking about retention -- as well as the fact that not everyone is entrepreneurially oriented -- we actually think the independent sector is not going to be as viable in the long-term. I know they're spending a lot more on recruitment now and adding recruiters, but I think they're seeing diminishing returns. They're going to spend more, get less and start focusing more on retention.

One of the factors that may impact recruiting moving forward is segmentation. Every brokerage firm is trying to align advisor skill sets and services to the levels of affluence out there, and trying to find an economic balance. I don't know what correlating effect it will have on recruitment, but everyone is trying to find an exact candidate, which is difficult to do. Merrill probably is the most advanced in segmentation, but the others are all falling right behind.

DEGENHARDT: In 2003, I think many boutiques will show a lack of interest in the retail business, such as Lehman and CS First Boston, or get out of the business entirely. The wirehouses will probably continue to tread water. The firms where managers are focused on recruiting will gain. Others will lose because upper management is cutting costs. Brokers will look at firms like RBC Dain Rauscher and Wachovia, which are offering them a fresh outlook. They are also going to look at independent firms.

McGOUGH: I think 2003 is the year of the broker. Brokers are going to be in demand -- and from some unusual sources. You have American Express Financial Advisors really trying to add a good number of brokers. I guess they will be independent contractors or franchisees, as they call them. JP Morgan Chase is probably going to add several hundred brokers. Average productivity there is over $500,000 per retail broker. The packages and services they offer are much more integrated than what you would find at some other broker-dealers. That type of enterprise is someplace the upscale broker at a full-service firm would be interested in going to at this point in time. Why? At his old firm there are fewer sales assistants, and they are being nickeled and dimed. His branch manager now runs five branches and is rarely available. This has created a level of unrest among good brokers.

I think most of these other kinds of firms would be thrilled to get a $500,000 producer. And the compensation at some of these firms is very, very generous.

KING: George, are brokers at Chase compensated on a commission basis or salary plus bonus?

McGOUGH: Commissions. It is very interesting to watch what they are doing. At Wells Fargo or JP Morgan Chase or Bank of America, if you are a $300,000 to $400,000 producer, you no longer have to cold call or seek out new clients. The referrals that come in through new business development and the bank platform are huge.

At some of the major banks, if a customer sells his house and deposits a check for $300,000 -- partially into a savings account and partially into a CD, for instance -- the system automatically alerts a broker the next day by popping the customer's zip code on the broker's screen. Cold calling is replaced by a very sophisticated referral program.

ELZWEIG: For a lot of brokers, there is a price to pay for those bank referrals. You no longer own the franchise, and the customers never really can be transported elsewhere. It's good, but you have to be willing to pay the price.

McGOUGH: The appeal is to the broker who is 50 years old. He's going to be working another 10 or 12 years, and doesn't want to be fighting with his own firm all that time.

ELZWEIG: I've found that the top banks are hiring better people who have been in the business longer and demonstrated they can sell. Their average production is around $400,000, just like at the wirehouses. The problem is that once you lose control of your franchise, you can be shifted from one branch to another and your payout slashed and you really don't have much recourse.

McGOUGH: That's true, but the other side is that they also have other resources, such as mortgage experts. They can turn over particular aspects of the client to a specialist and get paid for it as well.

ELZWEIG: When I speak with brokers at banks or in private client groups, they feel they work for a whole organization that helps them manage their account. When you are a broker at most wirehouses or regional firms, you are more like an entrepreneur who sets up a concession stand and the firm just monitors you to make sure you don't break any rules. But they don't actively help you grow your business or take any responsibility for how the account is handled.

McGOUGH: That negative to the broker-dealer is a recent development. In the past, firms would do seminars and sponsor other efforts for brokers to grow their books. But with cost cutting, those services just aren't there at the full service broker-dealers.

TASNADY: I'd like to comment on how brokerage firms are segmenting their business, and how this affects brokers and compensation.

Merrill, as we know, is moving smaller clients to a service-center type operation, while giving more service to very high-net-worth clients. Schwab is coming at it from the other side, reaching into the top market with U.S. Trust.

As the firms look to expand, brokers are enjoying a lot more alternatives and, in many cases, different lifestyle choices. At Schwab, for instance, you don't have to make cold calls; you might get paid less, but it's a nicer lifestyle. And on the high end, we see more of the private banking model.

These different choices mean all compensation must become more customized. For example, some firms only offered stock in their deferred plans, which was great when the stock market was wonderful. But with the stock market down, those firms are at risk; their brokers' golden handcuffs might be worth half of what they were last year. So some firms, including Merrill Lynch and UBS PaineWebber, have plans that put some deferred comp into cash. It might not grow as fast as stock in a great market, but at least it will be there to hold brokers when it is needed most.

ELZWEIG: That's a very good point. The real frontier in recruiting is deferred compensation. All the firms essentially are competing for a relatively fixed pool of large producers who are able to maintain or grow their business in any kind of market. The way the firms are going to get real traction in recruiting those people is to address their deferred comp problem, which they are starting to do.

Apropos of another point Andy [Tasnady] made regarding segmentation: The average, mass-affluent client -- the one with $100,000 to $1 million -- is not doing any kind of investing right now. They've fled. Brokers call them the living dead. They are on your books, but they don't do anything.

Brokers have been really shattered and traumatized this year. With two or three years of bad statements, they're very afraid to move. But what I see happening this year is that as soon as there is a little optimism and a little bit of a bounce in the market, and we go from severe misery to moderate misery, brokers leave. They have more confidence. Until now, except for the very best people, most haven't had the confidence to make a move, which is quite understandable. That's why I think the recruiting environment will get better.

OWS: Many of the large firms tell us that they plan to hire thousands of brokers. Is that possible? And how does it square with their downsizing moves?

ELZWEIG: The hiring now is different. It is selective upgrading. Nobody is interested in just adding more bodies to the sales force. They want to hire people who are better than the ones they have.

SARCH: It's a very local matter. A given Merrill Lynch office may be weak in their marketplace, so they might settle for less. But as long as they are upgrading, they will be aggressive. I think every new manager has a mandate to fill his empty desks and upgrade what he has.

McGOUGH: One of the people I am working with now is one of the top branch managers at a large firm, and his focus is building teams. He'll hire a financial planner, a CPA, or an attorney and put that person onto a team with three brokers. The new person will work on a salary for a year and then become part of the production team. Their average productivity is huge. It's been a very successful move. It's done very selectively and carefully, and the new hires become upscale producers who go after high-net-worth clients.

OWS: Is the whole firm picking up on that model?

McGOUGH: I don't know, but the overall performance of that particular unit is right at the top of the firm.

GALLANT: Our data show that teams have higher revenue and assets under management, but also higher overhead. We see most firms trying to foster a team environment, but it is a difficult thing to put together. A lot of the wirehouse teams try to push new recruits into some type of specialty, such as retirement or tax planning. The problem is that everyone now calls himself a financial planner or a wealth manager -- even though a survey we did found that just 26 percent actually do financial planning.

DEGENHARDT: Regarding teams, I have heard more complaints about teams over the last six to eight months from $700,000 to $3- to $5-million producers at wirehouses. These people are upset because firm management is actually dictating the person who will join their team. That doesn't increase company loyalty.

SARCH: Four out of five deals we did last year had some element of teams. But we also saw more divorcing teams. One of the team members, junior or senior, decides it isn't working and they either split amicably or they fight for the accounts. Some of the big 10-, 12- and 15-member teams that have been established over the years are now breaking up. So while all the firms have some very good team trainers, they are dealing with the inevitable human issues that are breaking teams up.

ELZWEIG: I find the same thing: a lot of ugly divorces. But the reason firms are stressing teams is that if their brokers are going to compete with Sanford Bernstein or money managers or private bankers, they are essentially competing against teams that have one person raising the money, somebody else managing the money and a third group doing client service. Like it or not, the brokerage industry has to move to a team model to compete successfully.

TASNADY: The challenging aspect for firms in managing teams is that compensation and incentives are individual-based. The only way to pay a team in a brokerage firm is for everyone to get a percentage of the cash commissions, which is an oddly shaped system. The brokerage teams make it work, but I think there are opportunities for firms to look at alternatives.

OWS: Are teams the future of the industry?

JOHNSON: Yes, in order to compete, brokerages will need teams. It's an industry fantasy that the average broker can manage money.

Another fantasy is that firms will meet their recruiting goals. If you added up all their goals, it would equal five times the number of high producers in the industry. But they need to plop in 500 brokers, because 500 times $700,000 is the revenue they need to hit their budgets.

The third fantasy is that high-net-worth is the answer to everything. Most of our clients have been tremendously unsuccessful in the high-net-worth business. The idea was that rich people were not only rich, but stupid. The truth is, the rich didn't get that way by giving their money to everybody who came calling. It's been much more difficult to crack HNW clients than firms thought it would be. HNW clients are illusive, they are being sold by everybody under the sun, and most firms don't have a lot of competitive advantage. Everybody has wood paneling, leather binders and computer printouts; most plans to attract the HNW have very little substance.

SARCH: Maybe the HNW market shouldn't be the target. One broker I know said his sweet spot is a $5 million to $10 million guy, an entrepreneur. Someone with $50 million in assets doesn't have to worry about planning for his kid's college education or his retirement. Their problems are different. They involve lawyers, estate planning and taxes. This typical broker doesn't find those problems fun, and he doesn't enjoy meeting those people or dealing with their advisors.

GALLANT: I think the problem of going high net worth is a byproduct of the emphasis on fee-based pricing. Fees mean recurring compensation, which means providing recurring advice, which means a deeper client relationship, which means spending more time with your clients, which means seeing fewer, wealthier clients.

The problem is that in order for the broker to pay the bills, he has to keep going upstream, and it doesn't make sense. The segmentation the firms are working on may resolve that, but going for the wealthiest clients isn't easy.

OWS: Is fee-based business as big as it's made out to be?

McGOUGH: The typical broker- dealer is shooting to have 40 percent to 50 percent of its retail revenues come from the fee side.

ELZWEIG: I think the number now is about 20 percent to 25 percent at most firms.

GALLANT: It's really just a small slice of the marketplace that embraces fee-based pricing -- probably 10 percent of the advisors in any wirehouse. And that's not trailers from C shares. Every firm is pushing fees and financial planning, but it will take years to get there.

When people ask me which channel will win out in fees and planning, I'm big on the wirehouses. They're training a scalable new crop of advisors that will be planning- and fee-oriented. I think it will take 10 years to make the change, and until then there will be a big battle with the independents. If the wirehouses push too hard, they could give a big windfall to the IBDs.

TESTERMAN: When you talk about financial planning, there is an inherent conflict of interest that has been in the brokerage business from day one: How can you really be an objective financial planner if you are going to get a commission based on a product that you recommend? Until the brokerage model changes, I'm not sure the client really will get objective financial planning.

SARCH: I disagree. Not all clients want to pay fees. I know a transactional broker who said his clients like dealing with him because they know he will return their calls because he might be getting a trade. And they understand that if the broker abuses that privilege, he'll lose them as a client.

When returns were 25 percent a year, it was easy to charge 1 percent to 2 percent. But now people are losing money, and justifying fees is more difficult. Firms, of course, want a fee-based utopia where they have predictable revenue and take all investment decisions out of the hands of the broker. But the reality is that many clients want to deal with a broker and be able to go to a cocktail party and say they bought AOL low and sold it high. There is a real demand for the transaction business, despite what the brokerage firms want brokers to do.

OWS: Among the brokers you moved last year, how much money moved with them?

SARCH: During 2002, people were a lot more successful than in 2001, mainly because customers had lower expectations. We found brokers were able to bring 80 percent or 90 percent of what they wanted to bring, if they were able to make a compelling argument to their client.

GALLANT: What about moving when you have lots of separately managed accounts?

ELZWEIG: It's not that much of a problem. About 75 percent of the managers in the major programs are the same.

DEGENHARDT: And only a handful of brokers account for 80 percent of the managed money.

OWS: To change the topic, what about the $250,000 producer. If the future of the $350,000 producer at a wirehouse isn't bright, what should the smaller producer do?

ELZWEIG: That person is a really good candidate for a Schwab or a Quick & Reilly or a regional firm.

MC GOUGH: I have a regional client and they will entertain all you have at $250,000. They can make money at $250,000 with the traditional product mix. It really depends on the product mix and compliance. I ran a brokerage firm at one point, and we were going to get rid of people below a certain level. When we looked into the $250,000 producers, we found they were very, very lucrative doing four or five tickets a week. A $250,000 producer would have to consider how much he's costing the firm.

SARCH: Unless you close an office, you are not saving that much money. For the $250,000 producer, it depends on the office. If your manager is looking to upgrade and you're at the bottom of the totem pole, you've got a problem. But if you're in an office with 20 empty desks because you're in a brand new space, I probably wouldn't worry too much.

TESTERMAN: In a survey we did of independents, banks and wirehouses, we found that nearly half the firms said they would consider people in the $100,000 or less range.

JOHNSON: The $250,000 broker should probably look in the mirror and ask, What am I good at? What do I want to be good at? How old am I? And what kind of firm would be the best fit? If I'm at $250,000, and that's as good as it is going to get, my time with a major warehouse, fair or unfair, is limited. But there are lots of other places. You could go to Schwab and get paid well in a much more positive environment.

McGOUGH: Two years ago, the $250,000 producer was a $450,000 producer, so is it worthwhile hanging on to that individual? Then again, put that producer in a bank, and he'll wind up doing $500,000 or $600,000.

SARCH: The rising-star $250,000 producer is in incredibly high demand.

OWS: Has the broker recruiting business been in the same state as the brokerage business over the past three or four years?

TESTERMAN: We started in May of 2000, and it was a good year. The following year was great, then we saw revenue drop by a third in 2002.

McGOUGH: >From September 2001 through September of 2002, I would say it was off 35 percent. Since November, it has exploded on the upside. I hope it is a leading indicator of what is going to happen in the industry, but we have a ton of projects going on, which actually took us by surprise.

KING: We doubled our production in 2002; and if you believe that, keep dreaming. It has been the toughest year I've seen. Business is off by a third to a half.

McGOUGH: I think the interesting aspect of it is the indecisiveness and absence of confidence on the part of clients. The recruiting cycle takes a lot longer.

SARCH: And we all know that time kills all deals.

ELZWEIG: And much of the decision-making power has been taken away from the local branch manager. They are more like corporate executives than entrepreneurs. For the smallest of matters, things go up to regional managers and national sales managers, which makes it very hard to close.

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Editorial Staff