Merrill Lynch will temporarily stop paying top dollar to recruit experienced brokers, according to a person familiar with the matter, the latest brokerage to make changes to how it compensates brokers poached from rivals.
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The firm, as it navigates broader changes to its business under the Labor Department's fiduciary rule, has told some executives that as of June 1 it will no longer offer signing bonuses that typically paid top brokers who join Merrill as much as seven figures, the person said.
Potential recruits who are already being courted by Merrill before the deadline won't be affected and will still be offered the typical signing bonuses, the person said. But after June 1, a pause on all recruiting will be implemented as the Bank of America Corp.-owned brokerage develops a new incentive package, the person added.
Meanwhile, Merrill is testing a new incentive plan geared toward attracting brokers with less experience from regional brokerages and independent broker-dealers, among others, the person said.
The program, which bears similarities to programs offered by firms like Edward Jones, would target brokers with three to eight years of experience and would guarantee a base salary for three years. On top of the base salary, they could earn additional pay via a bonus, as well as a percentage of the fees and commissions they generate.
After their first three years with Merrill, those less experienced recruits would shift toward a broker's typical compensation model there: a percentage of the fees and commissions they generate using the so-called compensation grid on top of incentive bonuses for new assets and lending, among other activities, the person said.
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Merrill doesn't intend to modify how it currently pays brokers, the person added.
AdvisorHub earlier reported Merrill's recruitment changes.
Merrill's actions likely signal an end to often expensive practice of recruiting brokers from top rivals, something brokerage executives often called "prisoner exchange," as firms look to tamp down costs and comply with Labor Department's fiduciary rule requiring brokers to act in the best interest of retirement savers.
"For a long time all the [brokerages] felt the price of recruiting had gotten out of hand," said Mindy Diamond, president and founder of Diamond Consultants, a Morristown, N. J.-based recruiting firm for financial advisers that does some business with Merrill. "It remains to be seen if it's a sound strategy."
Ms. Diamond said the move will likely make it harder for brokers who generate $1 million to $2 million in fees and commissions annually to move their businesses to Merrill. Brokers or teams that generate more revenue will likely be able to take advantage of Merrill's revamped recruitment offer, she said.
Last year, UBS was the first big brokerage to announce it would reduce by 40% the number of brokers it poaches annually. UBS said it would use the money it saved from hiring expensive rival brokers to better compensate its existing broker force, while still selectively recruiting big-money teams of brokers.
The overall size of recruitment deals had already been falling due to the fiduciary rule, Ms. Diamond and other recruiters said. Firms including Morgan Stanley were forced to cut the overall size of their deals late last year by removing the incentive-laden back-end portions of those packages to avoid potential conflicts that are problematic under the fiduciary rule.
Such deals were typically structured to pay three times the annual revenue a broker generates off fees and commissions, with up to 150% paid out initially when the broker is hired, while the rest had to be earned after hitting certain asset and revenue targets over the life of the deal. Those back-end hurdles were at odds with the rule's requirement that brokers minimize conflicts that might cause brokers to give conflicted advice.
Brokers had often dubbed the traditional recruitment deals offered by Merrill, Morgan Stanley and others as "golden handcuffs" since the signing bonuses were usually given in the form of loans forgiven over as long as nine years.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
May 12, 2017 14:26 ET (18:26 GMT)