Merrill Lynch Revamps Broker Pay to Reward Referrals, Stronger Growth

By Lisa Beilfuss Features Dow Jones Newswires

Merrill Lynch is adjusting the way it rewards its brokers as it looks to juice more from its current ranks while ensuring wealth-management clients are referred to the parent bank.

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Bank of America Corp's wealth-management arm in a memo to advisers that was previewed earlier Wednesday unveiled the changes to its 2018 compensation plan, introducing a bonus system that allows a broker to earn up to an additional 2% in pay if certain growth targets are achieved. Those thresholds include 5% growth from a year earlier in the amount of net new assets and liabilities like securities-backed loans brought in, and at least five new affluent households or two ultrahigh-net-worth household clients, people familiar with the matter said.

But in order to have access to the new award program -- in addition to other perks such as paid vacations for top producers -- brokers must refer at least two customers to other parts of Bank of America, including its online brokerage platform Merrill Edge and its retail bank. That means brokers who hit growth targets without making two client referrals would forfeit a 2% pay increase.

The referral quota itself is unchanged from 2017. What changes is that instead of levying a 1% pay penalty on brokers who didn't meet the referral quota this year, the bank in next year's compensation grid positively incentivizes the referrals.

"The focus on referrals is strengthening over time," said a person familiar with the matter.

Still, regardless of referrals, Merrill brokers who fail to meet minimum growth targets -- at least 2.5% growth in net new assets and liabilities and three affluent household clients or one ultrahigh-net-worth household -- will see their pay fall by up to 2%. Merrill defines affluent households as those with at least $250,000 in investible assets at Merrill Lynch; ultrahigh-net-worth households have $10 million or more in investible assets with the firm.

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Some of the compensation changes are designed to address conflicts of interest that can crop up when a broker has an incentive to make certain recommendations. In prior years, Merrill Lynch had an award program that was hitched to the sales of particular products. The 2018 formula doesn't incentivize one type of product, from credit cards to securities-backed loans, over another, said people familiar with the matter.

The market is moving to a fiduciary standard," one person said, "so ensuring potential conflicts are minimized is part and parcel." The firm wants "to stay very far afield from product-level incentives," the person said.

The compensation changes at Merrill also come at a time when brokerage ranks are shrinking and recruiting is stagnant across the industry. Competition from robo advisers, discount brokerages and registered investment advisers is also heating up as firms across the wealth-management industry vie for new clients and try to grab more of existing clients' assets.

"The market opportunity is huge," head of Merrill Lynch Wealth Management Andy Seig said in a memorandum announcing the 2018 pay changes to the firm's force of about 15,000 brokers. While the firm has been investing in digital capabilities, advertising and upgraded products and services, "one last missing piece is compensation," he said, calling the design of the new plan meant "to align incentives with growth behaviors."

A person familiar with the matter said the firm expects growth-award costs to be "greatly offset" by the growth they're designed to encourage.

The 2018 pay formula also makes adjustments to two broker groups the firm hopes to better leverage: brokers who have the smallest amount of assets under their care and older brokers who are nearing retirement.

The lowest-performing brokers -- often young and working to establish a bigger book of business -- will see a significant pay raise in 2018. Merrill is eliminating the lowest rungs of its pay grid, meaning advisers who bring in under $350,000 in revenue will next year keep 34% to 35%. In 2017, those ranks earned between 20% and 25%. "This is eliminating the penalty box," said a person familiar with the changes, which "was designed to catapult an adviser back in the direction of growth but didn't do that very well."

At the same time, the firm is sweetening the deal for advisers who are retiring and transitioning their clients to other Merrill brokers. Starting next year, advisers transitioning their client books will earn up to 200% of the revenue brought in over the prior 12 months, up from 160% in 2017. Retiring advisers stand to make more if they increase their assets during their transition, and those with a bigger percentage of fee-based assets also will also reap more.

Industry consultant Andy Tasnady, who was involved in the design of the new compensation plan, said Merrill Lynch is trying to increase revenue from current brokers to fill the gap left by an industrywide recruiting retrenchment. He also said the firm is trying to encourage brokers a few years away from retirement to stay at Merrill Lynch rather than make one last jump.

"It will help improve retention," Mr. Tasnady said of the 2018 pay grid, while signaling to brokers that Merrill is trying to accelerate growth. The idea is to raise productivity, said Mr. Tasnady, or the amount of money generated per adviser. Productivity fell 4.4% in Merrill's most recent quarter from the one before, to $994,000 per adviser. At Morgan Stanley, by contrast, revenue per adviser rose 2% sequentially in the third quarter, to $1.07 million.

Write to Lisa Beilfuss at lisa.beilfuss@wsj.com

(END) Dow Jones Newswires

November 08, 2017 17:25 ET (22:25 GMT)