J.P. Morgan Securities Unfurls New Comp Plan on Eve of Reg BI
J.P. Morgan Securities told advisors in its traditional brokerage unit on Thursday that it is simplifying its compensation structure by adopting a single payout at the current top grid rate, capping mutual fund and annuities fees and broadening annual “growth award” eligibility to almost all of them regardless of production level.
“A key tenet of this regulation is that you may not place your financial interests ahead of the interests of your client,” J.P. Morgan Securities Chief Executive Chris Harvey wrote in explaining the unusual mid-year changes to the 2020 plan. “We are taking this opportunity to simplify our compensation structure and better align it with our clients’ needs.”
He highlighted five adjustments to the comp plan, saying additional details will be available to the unit’s 475 advisors (many of whom J.P. Morgan absorbed from Bear, Stearns’ retail brokerage unit during the financial crisis) next week:
- “Moving from five grids to one grid (top grid of compensation plan);
- Reducing the minimum ticket size from $75 to $25 to be eligible for compensation;
- Extending eligibility of annual growth award to ALL advisors with 4 years at the firm as of 1/1/20, regardless of production levels;
- Changing ALL variable annuities to 1.25% upfront with an annual trail of 1%;
- Adding a cap on mutual fund advisor compensation at 4%.”
A JPMorgan Chase spokeswoman confirmed the accuracy of the memo that was reviewed by AdvisorHub, but declined to elaborate on specifics of the changes or their applicability to Reg BI.
The changes appear aimed at simplifying internal operations at the banking giant’s small wealth management brokerage unit as much as they are focused on the new regulation, said advisors at the firm and consultants who were told of the memo.
J.P. Morgan Chase & Co. in December combined into a single U.S. Wealth Management administrative unit the traditional full-service brokers in 21 offices with those based in its 3,500 bank branches and staffers at its online YouInvest robo business, and installed a new executive over Harvey and his counterparts in the other units.
“Simple is usually better from an operational perspective but I don’t see single grids being particularly Reg BI driven,” said Buddy Doyle, CEO of Oyster Consulting, a wealth management compliance firm who did not work with J.P. Morgan on the plan. “They are probably doing this not only to comply, but to make some business decisions good for them in a market where margins are squeezed.”
The compensation changes are unlikely to have a significant effect on pay—most of the brokers currently get payouts of 40% to 50%, said one advisor—and the fund and annuities product caps are consistent with what other firms and other private wealth and branch-based wealth units of J.P. Morgan Chase & Co. have already adopted.
Lowering minimum compensable stock trading tickets to $25 from $75 counters industry trends but could help some brokers impress clients with discounts, said Andy Tasnady, a compensation consultant.
“They may have done the math to say it’s a net plus to most brokers, so why not combine the good-news story with the regulation,” he said of the overall changes. “Keeping your existing clients happy and bumping up the payout rate are incentives to grow the business.”
Robert Lavigne, head of compliance at Bates Group, a consulting firm, said he had not heard of other firms making compensation changes in the countdown to the Reg BI deadline. But the new limits on mutual fund credits and variable annuities—one advisor said the firm is dropping the option of a lump-sum upfront payment in lieu of a 1.25% max with the 1% trails—align with widespread product changes brokerage firms have been making.
“They have been putting in product scorecards to weed out those that are overly expensive,” Lavigne said, “but I haven’t hear of anybody at this moment changing the compensation structure [for Reg BI purposes].”
Adopting a single payout formula also could help simplify the disclosures that the SEC is requiring firms to make to prospects and customers in a “client relationship summary” they must send when making recommendations to retail investors.
The SEC and Finra also have issued Reg BI guidance alerting firms to be on alert for aggressive sales as brokers approach new grid threshold levels, some of which may have influenced the J.P. Morgan single-grid change.
“Ensure supervisors are aware when people are on the cusp of these levels to make sure that the activity engaged in is in fact in the best interest of the client,” according to an Oyster Consulting summary of the guidance. “Ensure supervisors, branch managers and compliance people are aware and actively reviewing activity where compensation levels are ratcheting up, so that the Registered Rep has the best interests of the clients, and not his or her best interest, in mind.”