Branch Manager Role Dying Out at Wirehouses
by Jeff Bischoff // Published in FundFire
Jeffrey Bischoff is the president of Old Greenwich Consultants, a boutique executive search firm focused on the private wealth management industry. Previously he served as senior v.p. and national recruiting officer at Smith Barney, as well as executive director and head of recruiting at UBS’s private wealth management division.
I advise my friends who run wirehouse branches to make and save as much money as possible while they still can, because branch managers have become an endangered species. That is truer today than ever.
As first reported in FundFire, Morgan Stanley recently downsized and reorganized its branch manager ranks – again. From my count, they now have 101 fewer non-producing branch managers and regional directors. If you analyze the press reports, you can see that there are now fewer people at Morgan Stanley with the title “complex manager” and more with the title “producing manager.” Obviously Morgan Stanley’s senior executives are doing anything they can to refurbish the firm’s profit margins.
The entire industry is still emerging from the wreckage of 2008 and 2009, and the big-four firms are all trying to find things – or people – to throw overboard to keep the ship afloat. Branch managers in particular seem to be under increased pressure, as evidenced by Morgan Stanley’s sweeping changes.
I think I can pinpoint exactly when the branch manager job went from critically important to endangered. Let’s go back 20 years to the early ’90s and analyze the struggles of Prudential Securities Incorporated (PSI) and its failed limited-partnerships division.
During that era, the SEC investigated the firm for suspected fraud and found that Prudential Securities had defrauded investors of close to $8 billion. It was the largest fraud found by the SEC in U.S. history to that point. In all, some 400,000 people lost money on the limited partnerships. The firm reached a $330 million restitution settlement and had to pay an additional $41 million in fines.
What happened next? PSI started hemorrhaging advisors and teetered on complete failure. Prudential Financial, PSI’s parent at the time, made the decision to save the subsidiary, and our industry was changed forever.
In 1994, PSI rolled out its infamous 50/50/50 advisor recruitment deal: 50% cash up front, paid on the advisor’s production over the trailing 12 months, and 50% grid payout going forward for 50 months. At the time, those terms were unprecedented in the wealth management industry.
Suddenly advisors became nothing more than a keeper of cash flow, able to be bought and traded like a muni bond. Suddenly branch managers’ jobs became much more difficult. The days of long lunches with their top advisors turned into long lunches with their competitors’ top advisors.
After the scandals, PSI was seeing 20% to 30% attrition. PSI’s desperation changed everything, and the ramifications of that 50/50/50 deal are still being felt today at the wirehouses. Up until that point, well-run firms like Smith Barney saw 6% or maybe 7% annual attrition and reluctantly paid 30% cash signing bonuses for their best recruits. Nobody left Merrill Lynch. Nobody left Goldman.
However, PSI’s decision to offer the lucrative 50/50/50 deals essentially announced advisor “free agency,” and after that everyone was fair game.
Branch managers became frozen with fear as Fridays before a three-day weekend approached. They were constantly wondering, “Who is leaving this week?”
Branch managers started looking for places to cut costs. Entertainment budgets moved away from the advisors and over to the branch manager for recruiting. Branch managers fired assistants and changed the coverage ratio from one assistant per $1 million of production to one assistant per $1.5 million or more.
Meanwhile, branch managers became assessed in a binary way: They were either good recruiters or bad recruiters. The “good” managers – the ones who were able to land top-producing advisors from the competition – got raises and bonuses, while the “bad” managers saw their compensation cut consistently.
The industry became a true auction. Branch managers had to recruit new blood just to stay even. Top brass held weekly firm-wide conference calls to discuss the “ins and outs” report.
Recruit or go back into production was the bluntly stated mandate. In response, some branch managers went to 10 recruiting meetings every week.
In the wake of this upheaval, a Smith Barney branch manager hired 20 advisors in a year, and he was paraded around the firm as a “great” branch manager. Nobody talked about the eight senior vice presidents he lost out the back door. His profit-and-loss (P&L) statement lost $15 million of full-margin production in a trade for $15 million of no-margin production. How can that be paid for? How can that be sustained?
Deals went from three years to five years to seven years to nine years. Lawyers debated if the firm could print 10-year deals without violating contract law.
Branch margins were cratering.
As the advisors made more and more money, as the transition deals exceeded 300% all-in, the wirehouses had to make cuts somewhere. It isn’t hard to see where that “somewhere” is.
Unfortunately, branch managers have become a line item. They used to be highly paid, critically important career coaches and stalwart leaders. They used to have the corner office and the best parking space. Now those perks belong to the biggest producer, most likely a recent hire.
There are some really good branch managers in the industry, critically important to their respective institution’s local aspirations and goals. However, the fact remains that the home office is thinking about ways to pay them less and work them harder or encourage them to go back into production.
Like in any business, the top-quartile performers will survive. But the industry changed 20 years ago when we entered the advisor free-agency era.
Branch managers don’t exist at firms such as United Capital, Focus Financial Partners and HighTower Advisors. They have been engineered out of the model.
Branch managers should be put on the endangered species list. It’s sad, because many of my good friends are branch managers – or former branch managers.