Most relationship managers working within the wealth management sector, whether they are called private bankers, financial advisors, wealth managers or any other appellation, can only dream of earning $10m in a single year. This is an amount reserved for a handful of their golden boy colleagues in the investment bank, trading room or hedge fund subsidiary. However, if you read to the end of this article you can find out how a successful private client advisor can access such compensation without breaking into their clients’ accounts.
But firstly, let us look at the different ways in which the wealth management industry compensates its relationship managers. We can break this subject down into five different groups: 1) retail banks 2) boutique banks 3) external asset managers 4) platforms and 5) broker dealers. For the purpose of this essay, I am using US dollars and the figures quoted are “ball park”, obviously varying from market to market and institution to institution. In each case, however, I have taken the example of an experienced advisor managing $300m of assets with a return of 1% (which is admittedly high but certainly not unachievable, especially in the last category).
In this category, we are referring to the private banking department of the retail banks and assuming that these banks are global players. A distinction has to be made between domestic markets, where the bank is likely to have a significant branch network, and overseas markets where this is usually not the case. A private banker working for a global Spanish bank in Madrid, for example, will usually benefit from referrals originating in the retail and corporate network. This might eliminate the need to “hunt” candidates from outside the group which obviously facilitates hugely the collection of assets. Such a person is likely to earn around $120k plus bonus as the salary cannot vary too much from parameters which are often dictated by the retail bank. The bonus will almost certainly be discretionary for regulatory purposes.
When this same bank has to recruit someone in Geneva, Miami or Hong Kong, they will probably have to pay a basic salary at least 50% higher and potentially double. The selected person, however, will probably have to develop their clients on their own with few referrals for the group. This obviously requires a different set of skills from the domestic private banker who is essentially an internal networker. With increased difficulty comes increased risk and hence the necessity to pay a significantly higher salary. The bonus will also probably be discretionary although probably higher for the same reason. Part of the bonus might be deferred both as an incentive for the banker to take a longer-term approach and also as a way of creating a financial cost should the person be tempted to leave the bank.
Most boutique banks are “pure players”, that is to say their offering is based almost exclusively on wealth management. There are no referrals to be expected from other departments and lending, often an important tool to open an account, will often be limited to Lombard loans. There are also some “merchant bank” style institutions which combine private and investment banking, but such models are rare and referrals between the two departments are often equally rare.
Such institutions have to compete on the one hand with the global banks and on the other with external asset managers. The compensation they have to pay is usually slightly higher than that of the global banks in their international markets. Brand awareness is almost certainly lower and bankers do not have even a glimpse of hope of internal referrals. Compensation reflects this and the private banker in our example could probably expect a basic salary of around $240k (the upper limit of the global bank).
However, because many boutique banks are privately owned, they have more flexibility when it comes to the bonus. The bonus is sometimes based on a formula and, in some cases, the total compensation can reach 40% of revenue which makes it competitive with external asset managers. Boutique banks are also less likely to defer partial payment of the bonus then their larger rivals.
External Asset Managers
External asset managers are the destination of choice for disgruntled private bankers but usually offer even less brand recognition than the boutique banks. Bankers who join such institutions have to be experienced and enjoy the loyalty of at least several clients. In such companies, the magic number to attain is $1m of revenue in order to make it worthwhile for all parties. It will be rarer to find advisors managing as much as $300m and we can expect them therefore to be well compensated. Most structures will be managing less than $1bn and it is only once they get beyond this number, and if the company is managing some larger and more sophisticated clients, that they can even start to think about using the appellation “Multi-Family Office”.
Most external asset managers propose a formula whereby total compensation is 40-50% of revenue. In rare cases, this percentage could be even higher but this would typically be offered by companies that are smaller and less successful or as an incremental rate once a certain revenue level is reached. There is usually a basic salary, especially in the case of the larger ones, which is at best competitive with a boutique bank but often lower because of the potential upside. In a typical and well-established multi-family office, the advisor may get a fixed salary of $200k and a bonus representing the difference. In the case of our example, someone managing $300m and generating a return of 100 basis points could expect to get a bonus of at least $1m. Such examples would, however, be rare and sometimes equity could be offered in lieu of part of the bonus.
Platforms have become the common currency in many sectors over the last two decades and it is no coincidence that the wealthiest man in the world is the creator of the most successful platform. Wealth management has also seen the establishment of many platform models in recent times. The model is similar to that of the external asset manager but will usually cover only services such as compliance, back office, secretarial support and office space. The pay-out is much higher, usually 70-80%, but the added value is obviously less. In such structures, there is usually no basic salary and the asset base of the advisors tends to be smaller.
If we take the same example of our advisor managing $300m and generating $3m of revenue, total compensation would be north of $2m. In reality, however, most people would be earning far less. Furthermore, if the advisor needs investment advice, financial planning or other services, these would be reinvoiced in addition to the usual fee and revenue share would fall to levels approaching those of external asset managers. For seasoned private bankers with loyal clients, such platforms can be extremely attractive options.
For those of you who have read my article to find out how to earn $10m in one year, you will have been disappointed. The example of the advisor working in a platform could potentially earn more than $2m, but this is still a long way short of the attention-seeking headline of $10m. But now we finally arrive at the answer to the question although, unfortunately, the broker dealer model is mainly limited to the US market and has become extinct for those of you working in most other markets. We will therefore focus our example on the very atypical US model.
The broker dealer model is common if not dominant in the US. Whilst it seems antiquated to wealth advisors working in other mature markets, it is certainly a very attractive model if you are based in the US, at least for the broker dealers (for the clients it is more debatable). The broker dealer world is hugely competitive and the name of the game for the institutions is to increase assets, some would say at any cost. This is done not by offering attractive compensation or a highly differentiated product offering but rather by “buying” the assets with the most attractive formula. A typical acquisition price is between 100% and 300% of the advisor’s previous year’s revenue (“trailing twelve”).
By way of caveat, it needs to be said that the payment of 300% has become rare and the “trailing twelve” is often adjusted downwards to take into account the fact that not all assets will follow the advisor. Furthermore, employers are increasingly making part of the payment on the “back end” when certain objectives have been achieved. Nevertheless, there are still cases of 300% payments made upfront. If we return to our example, therefore, and assume that our advisor convinces their future employer that all the assets will follow, they could receive a payment of up to 300% of their production. On this basis, they could potentially receive an amount of $9m on joining. Furthermore, if the assets are transferred immediately, they could also receive an annual pay-out which typically would be 40% of revenue or, on the basis of the same assumption, an additional $1.2m. Whilst there would not be a basic salary, our advisor should not have trouble paying the rent.
This example is surprising for most actors in the wealth industry outside the US but it is based on reality. Financial advisors at broker dealers do not “own” their clients. Yet there is almost perceived ownership and it is not unusual to see such people transfer up to 90% of their assets in the first few months, which would be inconceivable in most of the other examples (the prevalence of Pershing as a booking platform facilitates this process). Employers are increasingly taking legal action against people who leave, but non-compete and other restrictive covenants are not always easy to apply. It should also be noted that these payments are not sign on bonuses but rather “forgivable loans” which are amortized over a period of around eight years. If the employee leaves before the end of the period, a certain amount usually has to be paid back.
To summarize, my advice to any aspiring wealth advisor would be to join a broker dealer in the US, stay on for at least fifteen years in order to develop a large and loyal client base and then jump ship to a competitor. Unfortunately, when I look at the economics of such pay outs and changes in the regulatory environment, I fear that it may be too late and that this particular business model will not exist in its present form in fifteen years’ time.