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Merrill Lynch Company’s Fall Case Study


The result of bidding war for top brokers

The U.S households’ investments to Wall Street have increased steadily over the last few years as the country continues to recover from the financial crisis. The result is a scramble to hire the services of top brokers who are really good at their game to capture these investor dollars. The highly sort after financial advisors are the securities brokers, discount brokers and employees working for direct marketing and mutual fund groups. The bidding wars have added to the growing cynicism among investors about the practices of players in this industry.

The bidding war for top brokers has made the recruitment upfront-pay packages and bounties of the top advisers to go higher than they have ever been in all history. Some firms recruit top producers and entice them with huge up-front bonuses of up-to 70 percent of a broker’s one year trailing revenue, and extra-high commissions that motivates the brokers to promote excess trading. And it seems none of the big securities companies are willing to retreat from these bidding war. Merrill Lynch (which already has 14,000 brokers) is among those making big offers.

Regulators and Industry experts observe that such upfront-pay packages and bonuses can only encourage brokers to undertake transactions that aren’t to the best interests of their clients. High risk behaviors, as we learned from the 2008 financial crisis, endanger the welfare and stability of entire economy (Gordon 44).

The competition to enlist top-producing brokers from other firms by offering huge bonuses, like they are rock-stars is a bad practice that doesn’t serve the best interest of investors. The more bonuses they get from commissions the more they are encouraged to churn excessive trading of customer accounts so they can gain and keep more commissions.

Relationship between pay and performance for brokers

Brokers earn the largest compensation from commissions made by selling stocks and other financial products. Commissions are the largest source of wages for brokers, with top traders earning six figures from commissions alone. In most cases, these commissions are rewarded in addition to upfront-payments, referral bonuses, broker fees and other benefits that they earn for their work.

Unlike many other jobs, it is the selling activities of brokers that actually generate revenues for the brokerage firms. And for this reason firms provide incentives and hefty perks that encourage them to spend all their time trading.

Commission based compensation policies has always been the way of doing business at Wall Street. Most brokers work almost entirely on commissions and this means that they put their interests ahead of their clients’. While commission based incentives have played an important role in generating the industry’s’ vibrant investor services, they have also undermined Wall Street’s competitiveness (Moody 98).

While commissions still dominate, some big firms offer fee-based incentives. Brokers earn quarterly referral fees for referring customers to other products or brokers. Brokers are often given extra incentives to encourage them to peddle high-profit-margin products which are not necessarily suitable for customers.

The demand for brokers to deliver is relentless and young brokers who are still struggling to find their niche are especially vulnerable. In most brokerages traders are ranked on a daily basis by their commissions. Even veterans have to perform consistently or else their place is quickly taken by hundreds of new traders who are trained by big firms every year. Firms are able to sustain this high sales performance culture by offering hefty perks and incentives.

Subjective assessment of performance cross-selling

Cross-selling is generally an effective method of marketing which involves suggesting or actual selling of a similar or related product to a potential customer. As a way of generating more revenues and maximizing profits, the Bank of America (BofA) and other banks that own brokerages are encouraging cross-selling of bank products to advisory clients.

Indeed, if done well cross-selling can bring mean profits for firms and lucrative income and financial benefits for the stockbrokers, agents and financial planners. If implemented without careful consideration, cross-selling may alienate the advisors from their longtime clients who have helped them grow their businesses (Perkins 51).

Many brokers are however not welcome to the idea of subjective assessment and cross selling. The traders argue that there is little financial incentive to motivate brokers to hawk these bank products. Others feel that the idea of peddling products that a broker is not familiar with is risky and could hurt relationship with clients as brokers can’t warrant customer satisfaction.

Many financial advisers especially the veterans who have worked at independent brokerage firms and RIAs say that they simply can’t be told what to or not to trade and are not so enthusiastic working for a big bank. As it has happened in the other banks, forcing brokers to cross-selling would drive thousands away to join other independent firms or establish their own ventures. Recruiters predict that such a move will be to the benefit of RIAs and other independent firms who could lure in more brokers (Farrell 46).

How changes to the compensation strategy might affect Merrill Lynch.

Merrill Lynch has not made many major changes to its core payout structure since the bailout. However, in 2014 the America based brokerage firm introduced a compensation plan in which brokers working in teams were rewarded premium for investing in trusts money obtained from wealthy clients. The firm introduced a “client experience” award for top team players. To help Merrill retain their clients, the firm also introduced new retirement benefits for veteran brokers over the age of 55. The brokerage firm also increased benefits by doubling the revenue credits that its brokers get for attracting trust assets from rich clients (Sobel 77).

Top recruiters and leading recruiters and brokerage firms such as Morgan Stanley and Well Fargo believe that such team incentives make it harder for top brokers to be easily poached by rivals. The experts point out that in this industry it is almost impossible to move en masse and still retain clients. They also believe that teams enhance service by allowing brokers to specialize in areas that they are good at. Although teams of individuals specializing in various fields can effectively work to increase investments, experts observe that team incentives often fail to reward individual experience, sales skill and accounts size (Chernow 23).

Changes in compensation strategy should be done with care as they will incentivize the short-term or long-term performance of the firm. Strategies that focus on the short-term will encourage brokers to undertake risky transactions that favor short-term gains over long-term creation. Brokers will tend to focus on transactions which present opportunities for quick personal financial rewards. To avoid such risky undertakings, firms should adopt attractive and competitive remuneration not only in order to attract excellent traders but also to build stable and sustainable long-term corporate value.

Works Cited

Chernow, Ron. American Banking Dynasty and the Rise of Modern Finance. Boston: Wadsworth Publishers, 2013. Print.

Farrell, Greg. Wall Street to Main Street, Merrill and Middle Class Investors. New York: Crown Business Publishers, 2013. Print.

Gordon, Hoffman. The Emergence of Wall Street as a World Power. Washington: Berkeley & Wright Publishers, 2014. Print.

Moody, John. The Masters of Capital: A Chronicle of Wall Street. California: University Publishers, 2013. Print.

Perkins, Edwards. Fall of Merrill Lynch and Near Collapse of Bank of America. New York: Foundation Press Publishers, 2014. Print.

Sobel, Michael. Disciplining Investment Bankers and Stock Brokers. New York: Wall Street Publishers, 2015. Print.

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