(Dow Jones) Bank of America Corp.'s Merrill Lynch unit is taking a new, tougher approach toward its advisors who fail to build up enough business over the years.
Like other big brokerages, Merrill Lynch traditionally discouraged this class of brokers from staying with the company by paying them less, using a "penalty box" on its pay grid. Those penalties have stiffened over the years, making it tougher for veteran advisors to coast at low levels.
But starting at the end of 2011, advisors with 10 or more years of experience, producing less than $250,000 in annual client commissions and fees will be pulled from the advisor ranks, according to people at the firm. This is the first time Merrill Lynch has implemented a flat production minimum.
Advisors who fall below the cut-off point will have the option of being considered for other, lower-ranked positions at the company, such as client associates.
Merrill Lynch offers a general statement, saying the 2011 plan "aligns advisors' interests with those of our clients and shareholders" and "emphasizes a number of elements including deepening of client relationships, length of company service, and overall business growth," a spokeswoman said.
Merrill Lynch had 15,340 financial advisors, with an average annualized production of $841,000, as of the end of the third quarter. It isn't clear how many fall below the new production minimum.
"The new minimum isn't drastically different than what they have now with the penalty box," says Doug Dannemiller, a brokerage analyst with Aite Group. "They will just be forced out versus encouraged out."
The way broker compensation works is: The higher an advisor's production, the higher the percentage he keeps. An advisor producing $225,000 this year at Merrill Lynch gets to take home 37%, or $83,250. However, if they have more than 10 years of experience, they are pushed down to the penalty box, allotting them only 25%, or $56,250.
Most advisors don't stay at that level for long; they either improve or move to another firm.
"When you're in the penalty box, you've got your manager listening in on all your calls, you're not being treated well," Dannemiller said. "It's not a good place to be, especially when you can go (somewhere else) that will welcome you."
UBS Wealth Management Americas made waves last year with layoffs of about 650 advisors who were generally producing less than $250,000 annually. Also last year, UBS sold 55 low producing branch offices, with roughly 320 financial advisors, to Stifel Financial Corp.
It came as a shock to the industry, given that advisors are paid only on commission, rather than a fixed salary. With Merrill Lynch now following suit, it raises the likelihood others will, too.
"The big issue here is that Merrill and other wirehouses are embracing high production brokers and shunning lower ones," Dannemiller said. But if smaller and independent brokerages can find a model in which lower producers are profitable, the wirehouses ought to be able to also, he said, so as not to lose those assets.
Merrill Lynch could be hopeful that its new online and call-center-based brokerage, Merrill Edge, will allow it to retain the client assets of brokers they let go. Merrill Edge channels "mass affluent" clients with less than $250,000 in assets, and it's a more cost-effective set-up than having full-service advisors.
The firm could simply be clearing desks for more promising trainees too, Dannemiller said. Merrill hired 1,600 rookies this year.