Enhanced Compensation Under Scrutiny

Advisor Best Practices

So, you’re in your late 50’s and you feel that it may now be the time to monetize.  The market is at a new high and business is brisk.  You have probably read about firms like Luminous Capital, founded by Mark Sear and David Hou, who quadrupled their value after leaving Merrill in 2008 and think you might be able to do the same thing.   You may be able to, with the emphasis on may.    It’s all about how to create measure and unlock enterprise value.   For more on this see:  What is your Advisory Firm Worth?


Newton’s First Law

Regarding the proposed FINRA disclosure requirements concerning Enhanced Compensation, it comes as no surprise that the major firms are behind such a move.    Why?

It’s quite simple really.   Under the current deal terms offered by the top 4, the break-even point on a financial advisor producing $1M a year is 13.6 years.   I’d be happy to show you the math if you’re interested in seeing it.  If you approached any rational investor with a request for capital and told him or her that it would take 13 years to break even on your investment proposal I can promise you it would be a short conversation.

The only way the major firms would be willing to curb the escalating deal terms is to have FINRA craft a rule that would make changing firms less appealing to advisors.   If FINRA were to make a rule, it would create a level playing field and relieve any one firm from making the first move which would put them at a competitive disadvantage.   The fact that the industry framed such a rule under the pretext of protecting investors from conflicts of interest generates good PR, but that’s all it does.  If you do some deep analysis as to how many investors have been harmed as a result of enhanced compensation, you would find that there is statistically no difference in the relative number of customer complaints comparing the 2002-2007 and the 2007-2012 periods.

Looking forward once the rule is enacted, I believe you will see these major firms taking steps to modify compensation packages; ultimately resulting in a salary bonus model much like the one JP Morgan Private Bank now has.   Take a look at exactly what the proposal says, and draw your own conclusions as to whether or not this is the best time to make a change.   It’s also no surprise that the proposed rule comes when most of the best, top producing advisors still owe their firms too much from retention or recruiting loans.  http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p197599.pdf



True to the adage that no good deed goes unpunished, a young advisor decided to take a day developing business by visiting some of his former professors at his alma mater, a prestigious Eastern university.

When he made his way into the entrance he noticed a dog was attacking a small child. He quickly grabbed the dog, and with his two hands, choked the dog to death.  The next day the local newspaper reported the story with the headline, “Valiant student saves boy from ferocious dog”.

The advisor called the editor and suggested that a correction be issued and that the paper should tell its readers he was a successful Wall Street broker and not a student.

The next day the newspaper issued a correction and the headline read, “Pompous stockbroker kills school mascot”.


Technology and Innovation

Over the last 20 years, wire-houses have given up the retail and mass affluent market to their competitors in an effort to move up-market.   Seizing opportunity, LearnVest   focuses on providing inexpensive financial planning to young women via technology compatible with their culture, namely email, phone and Skype.

Reviews are mixed, particularly from industry traditionalists and its competitors as described in a recent article:  LearnVest Aims to Hire 100 Planners by Year-End      Check it out.  Chances are your daughter already has.