2018 Comp: Merrill Lynch Adds Penalties/Rewards to Spur Asset Growth

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Merrill Lynch on Wednesday put a dollar-and-cents handle on its concerns about the firm’s slothlike customer growth.

Brokers who fail to increase customer money by 2.5% in 2018 or do not sign up at least three new affluent households will have their payouts reduced by 2%. Alternatively, those who increase new customer assets and liabilities (such as loans and deposits) by 5% and who bring in five new household accounts will get to keep 2% more of the commissions and fees they collect.

“The design of our 2018 plan is intentional,” Merrill Lynch Wealth Management head Andy Sieg wrote in a memo to the firm’s market executives. “To align incentives with growth behaviors, and to encourage performance with thresholds set at levels that can benefit every advisor.”

Compensation plans designed to drive sales behavior typically include year-end bonuses that give cash and stock to brokers for hitting sales growth targets or selling certain products or account types. Merrill’s 2018 program breaks new barriers in applying a growth metric to their monthly pay, industry veterans said.

“It’s pretty bold in that it touches the third rail of compensation, the grid,” said consultant Andy Tasnady, referring to pay tables used throughout the retail stock brokerage community that tie the percentage of fees and commissions that brokers keep to their total annual production in the previous year.

In unveiling the 2018 plan to its almost 15,000 brokers after the markets closed, Merrill executives emphasized that the 11 revenue breakpoints on the grid that qualify them to earn from 34% to 49% of their production will not change. But increasing new assets and liabilities by 5% (with a ceiling for big producers of $15 million) will add 1% to the grid payout.

Brokers can tally another 1% of payout by signing up five households keeping at least $250,000 with Merrill, or adding two new accounts of at least $10 million each.

The stick? Failure to grow net new assets and liabilities by 2.5% (with a ceiling of $7.5 million) will slice 1% from a broker’s payout, and another 1% if he or she fails to sign up at least three new qualifying household accounts. Hitting one target and not the other will keep the payout percentage unchanged.

Merrill and its large competitors have for years endured slower client growth as their brokerage forces have become smaller and older, but had bandaged the problem by recruiting experienced brokers and their client books from each other. But recent decisions of Merrill, Morgan Stanley and UBS to end the expensive recruiting wars, and fears that more money is moving to independent advisory firms and robo-advisors, has stimulated a search for new growth solutions.

Sieg has been telegraphing his and Merrill parent Bank of America’s concerns, saying that net new growth of less than one household per broker a year had to be addressed and hinting that he would be dangling carrots and wielding sticks to change sales behavior.

“If they are not hiring they need to make it up somewhere else, and if Merrill comes in next year with great growth results because of this, competitors might follow,” said Tasnady, who is a consultant to the firm. “But it shows how serious Merrill is, because firms are risk-averse when it comes to comp plan design changes for fear of alienating brokers. You don’t often see bold changes, and this one’s a pretty good one.”

Under the new growth grid, a broker producing $800,000 who would have taken home $320,000 based on a 40% payout could have $16,000 added to her pay if she meets both growth goals—or lose that much for missing the targets. Similarly, a $1 million producer who gets a 41% payout worth $410,000 (about the average for Merrill brokers) could gain or lose $20,000 for hitting or missing the targets.

“It’s going to keep them on their toes,” said Alois Pirker, wealth management research director at consulting firm Aite Group, who had been briefed on the Merrill plan.

Merrill also has tweaked other parts of its comp plan.

To the chagrin of some advisors, it is deferring an extra 1% of broker’s cash pay into long-term compensation, meaning that deferred comp will range from 3.5%, for brokers producing $350,000 to $449,999, to a maximum of 7% for those generating $5 million or more of revenue. The deferred earnings—still about half the maximum that Morgan Stanley takes out of brokers’ pay—includes 25% in Bank of America stock that vests over three years and 75% in cash vesting over eight years.

Like Wells Fargo Advisors, Morgan Stanley and UBS Wealth Americas, Merrill will next year stop paying brokers and crediting them with grid revenue for retirement accounts for themselves and their families.

Merrill also has eliminated the so-called penalty box for brokers whose payouts plunged to between 20% and 35% if they produced less than $350,000 or $250,000 annually based on their years of experience. In 2018, the payout for under-$350,000 producers will be 34% or 35%.

Merrill also is eliminating the 1% grid reduction now imposed on brokers who don’t refer at least two customers to Bank of America, but will continue to exclude mortgage referrals from counting toward the quota. Brokers who do not make two referrals cannot qualify for the “growth grid” award increase, team-based grid award or so-called Top Advisor Summit trips.

Like its competitors, Merrill also is making changes to its program for aging brokers who are considering retirement, an important constituency given the graying of the broker population and the hiring slowdown across the big firms.

To encourage participation, Merrill is raising the base pay for brokers in the so-called Client Transition Program (CTP) to a range of 105% to 200% of the total revenue they produce, up from a range of 100% to 160%, with an opportunity to earn another 40% if assets grow while they are in the CTP. It also increases the length of the program, during which a broker’s book gradually moves to other team members, to five from four years. That gives some brokers more time to work down promissory note balances on retention or hiring loans, meaning they can leave without having to write a big check to the firm, one broker observed.

Brokers who “inherit” accounts from a CTP participant will receive payout on only 50% of the retiring broker’s production credits throughout the five-year period. Currently, payout for the receiving broker rises progressively to 60%, 65% and 75% at the back-end of the program.