EXCLUSIVE: Merrill to Halt Conventional Recruiting, Test Salary Plan

(Clarifies in 10th paragraph that early-career program participants receive a small part of their pay in grid-based compensation.)

Driven by efficiency directives from its parent bank, Merrill Lynch is withdrawing from the expensive recruiting battles for veteran advisers long waged by big firms and is piloting a program to hire less experienced brokers who are compensated primarily through salary.

As of June 1, the principal retail brokerage unit of Bank of America will stop offering signing bonuses, which typically reach high-six and seven-figure levels, to experienced brokers, according to well-placed sources at the firm and to recruiters who have been briefed by Merrill managers.

Deals in the documentation pipeline as of that date will be processed, a signal to managers to double-down on recruiting over the next few weeks and to close the deals in coming months so Merrill can boast of growth in its “herd” of 14,500 brokers at yearend, the Merrill sources said. The firm also is designing a new hiring package that managers will be allowed to offer to the rare “franchise” player from another big firm, but such offers will require heavy vetting, they said.

The recruiting pullback makes Merrill the second major firm after UBS Financial Services to curtail conventional growth-through-hiring strategies, with potential lasting effects on the worth of a brokerage career as well as on company bottom lines.

Pay consultants and firm executives have long complained that paying signing bonuses equal to multiples of the revenue that brokers produced in the previous 12 months rarely justifies itself because brokers retire, lose motivation or jump to rivals before firms earn back the bonus money through transferred customer assets and new business. Until UBS’s declaration last summer to cut recruiting by 40%, however, executives were unwilling to take the first-mover risk of losing brokers and assets to rivals.

“This is a major change,” said Mickey Wasserman, an outside recruiter in Los Angeles who works with Merrill and worries about the effects on his business.

Merrill executives internally are referencing Bank of America Chairman Brian Moynihan’s new mantra of ensuring “responsible growth,” which preaches that “not every dollar is a good dollar,” to justify the change to managers who have typically had their bonus packages tied closely to meeting recruiting goals.

To help offset the recruiting pullback and combat the chronic industry-wide challenge of replenishing an aging sales force, Merrill has launched a new program to hire brokers with three-to-eight years of industry experience who preferably have proven their dedication by obtaining a chartered financial planning or similar certification.

Dubbed PTA (Professional Transitional Advisors), the program is targeting recruits from smaller regional firms such as Edward Jones and Robert Baird, registered investment advisers, independent broker-dealers and banks, recruiters and insiders said. The program is being piloted in Chicago and a few rural outposts, and currently has fewer than 20 participants. It is expected to complement Merrill’s revived “community markets” initiative to bolster business in remote offices that have had little corporate support.

Significantly, Merrill is offering PTAs “nontraditional” compensation, comprised primarily of a salary for three years supplemented by a small grid-based payout and performance-related bonuses, said a person familiar with the program. The fledgling brokers will gradually transition to a conventional “grid” program that pays them a scaled percentage of the fees and commissions they produce.

Paying brokers salaries plus bonuses, rather than the traditional “eat-what-you-kill” production formula, is a model used at private banks such as Bank of America’s U.S. Trust division. It is also what some brokers and headhunters industywide have long feared could be adopted more widely.

“It’s the breakthrough alternative compensation strategy,” said an outside recruiter who spoke on condition of anonymity.

People familiar with the new strategies said that Merrill has also renewed support of its traditional PMD training program, with a new iteration of the three-and-a-half year program beginning in March. Together with the PTA effort, executives hope the programs can seed Merrill’s aging workforce with a new generation of brokers more amenable to working on teams and to selling the financial planning fee-based services and bank products that Merrill and its big competitors have been promoting as more sustainable than market-dependent investment advice.