Following the Money Trail
It’s a testament to the increasing complexity of the advisory
business: Many advisors—people whose very living depends on their
ability to track the ebbs and flows of money—are having trouble
understanding whether they’re being paid correctly by their own
firms.
Part of the problem, reps say, is the industry’s migration away
from the easy-to-audit transaction-based business model. Only a few
years ago, checking a typical advisor’s paycheck was about as
simple as gathering together copies of the tickets he’d written
and then doing some simple math.
Now, with the migration to fee-based advisory arrangements, payouts are
based on much more complex data.
“I have a pay stub that is 23-pages long, and has 600 line items
that range in value from $0.23 to $1,500,” says one Midwest-based
broker. “Yeah, I understand it,” he adds sarcastically.
It’s gotten so bad, he says, that one of his peers has hired a
third party to audit his paycheck.
The problem is not easily fixed. Reps in fee-based arrangements tend to
be paid a percentage of assets under management, and those values are
constantly in flux. Adding to the complexity, payout percentages scale
up and down as assets under management cross various thresholds. Throw
in the fact that many advisors also have some transactional business
(which adheres to a separate payout schedule), and you’ve got the
makings of one busy pay stub.
“In eight-and-a-half years, my payouts were never right,”
says one broker-turned-recruiter. “It might have only been $30
here or $80 there, but they add up.”
The recruiter says he would usually find the errors after running
through his yellow dupes and reconciling them with his pay stub. The
firm never gave him any trouble about ponying up for the mistakes he
caught. However, he notes, “Never once, were the errors in my
favor, not in 8.5 [years] times 12 [months].” And to think that
was in a simpler time—the era of commissions.
In today’s environment, few advisors bother to check whether they
are being paid accurately, mainly because poring over the daily and
monthly commission runs is time consuming. Younger brokers have the
most trouble finding time for such tasks, because building a practice
in the current environment is time-consuming enough. But even more
experienced advisors place the paycheck audit low on their priority
list. “I’m producing just above $1 million. Half of that
volume is fee-based, and I’ve had 15,382 transactions over the
past 11 months,” says one Smith Barney broker.
“That’s 1,280 transactions a month, so I just don’t
have the time to verify the trails.”
Indeed, the second-most common response to ‘How do you know if
you’re being paid correctly?’ was ‘I don’t have
the time to check.’”
The most common: “I have no idea.”
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