Wealth management firms are facing rising wage bills at the hands of a buoyant recruitment market and European bonus cap rules.
Base salaries appear to be rising as bonuses have fallen on the back of European-led regulation, but does this tackle the age-old dilemma of encouraging positive behaviours and avoiding conflicts of interest?
Firms are upping their game on the recruitment front. This could be attributed to surprisingly robust markets, alongside an optimism to capitalise on opportunities created by stronger economic growth, the retail distribution review, auto-enrolment and, one would imagine, the Budget more latterly.
This echoes findings from a recent Wealth Manager survey, which showed that 82.3% of an 80-strong sample of investment managers expected their company to increase headcount this year.
In what some describe as a change in culture, bonuses as a percentage of basic salary have moved downwards sharply, said James Brown, senior analyst at Compeer.
Yet the benchmarking group’s annual remuneration survey shows this decrease in bonus payments was largely compensated by a rise in basic salaries, which meant total packages ended up relatively stable year-on-year.
‘There have been many possible reasons [for a fall in bonuses], such as the remuneration code, that impacted on some of the larger wealth managers,’ Brown said.
‘Although bonuses have reduced, that is not to say they have vanished. They remain high in a number of positions.’
Likewise, Wealth Manager revealed that Coutts had slashed bonuses by 40% in recent months, a much higher figure than the 15% fall in bonus payments at parent group RBS.
A source close to the situation said that in one instance, a Coutts employee saw their bonus fall as low as £4,000, significantly below the six-figure sum they had expected. ‘Firms are just increasing the base salary, which is good, but ultimately it’s still driving the wrong behaviour because they are still targeted to sell products in a particular area.
‘It is very difficult [to find a solution] because while people need to be incentivised to work hard, incentivisation should be done the right way and a lot of it should be done around retention of clients,’ the source said.
In the source’s view ‘the industry generally is in a bad place’ due to incentivisation structures. ‘A lot of cleaning up is needed, as there is still a lot of bad practice out there.’
The source also views small to medium-sized companies as more incentivised to work in their clients’ interests, as the ongoing advice fee they receive is based solely on the growing value of clients’ investments.
‘That’s a natural incentivisation, but banks or bigger wealth management companies don’t do that, because trail payment was, and is, retained by the company. If that could, in some way, be shared with the adviser that would be a natural, increasing level of income, which would incentivise them to do the right thing.’
Allowances: new bonuses?
The source added firms were also using so-called ‘allowances’ to replace bonuses to ‘fiddle with the system’.
HSBC became the first UK bank to reveal how it adapted to the pay restrictions imposed by the European Parliament and the UK regulator in February. The bank’s chief executive, Stuart Gulliver, received a £1.7 million ‘fixed pay allowance’ in 2013, pushing his pay up to £4.2 million up from £2.5 million last year. Meanwhile, just under 240 of HSBC’s bankers received over £1 million in fixed pay allowances.
The ‘fixed pay allowance’ is paid in shares every three months on top of salaries. Another type of allowance comes in shares that can only be sold after five years, which were handed to 111 bankers, while others were handed extra payments in cash.
HSBC did not specify how allowances had been applied to the private bank, but many view it as a growing trend in the sector.
In contrast to others, Barclays upped its bonus pool by 10% in spite of a 32% fall in profits, with total incentive awards granted to £2.4 billion in 2013.
Dan Macey, an associate director at Suffolk Lane Search, a recruitment firm for private client businesses, said that while managers were receiving share options or allowances instead of bonuses, not all firms have resorted to paying higher basic salaries.
‘Some firms are picking up the basics, but not as many as people like to think. The levels of remuneration that I’m seeing have not really changed.
‘A banker that was earning £80,000 basic last year is not earning £150,000 basic now – that’s just not happened.’
While Macey takes the view that higher basic salaries alone ‘are not really the answer’, Gary Stockdale, co-founder and head of research at Vertem Asset Management said there is nothing wrong with the bonus structure if it encourages positive long-term behaviours.
Stockdale, who formerly worked at Barclays Wealth and Brewin Dolphin, said the issue is that bonuses have typically crystallised too quickly. ‘I’m in favour of bonuses that are paid on a sensible long-term formula. As for other incentives like [allowances, or] shares, the same applies: I think it is a good thing, as you get ownership of the business employees work for.’
Conversely, he is concerned about the fallout of higher salaries in the sector. ‘Is it better to have lower base salaries with more controlled bonus or allowance structures? Yes, just fixed in time and knowing how long you can retain your bonus. It’s dangerous if you get large fixed salaries, because it brings an incentive to leave [the firm].’
‘Locking everyone into a salary straitjacket and giving no flexibility to adjust back on a downturn is crazy.’
His solution? ‘Go back to lower salaries and add long-term bonuses.’ For this, however, he says the trade bodies need to get together and bring the case to the FCA in a ‘coordinated approach’.
‘Don’t go down the route of the scaremonger, where there’s a fear of losing all your bankers, and blackmail the FCA, but tell the regulator there is nothing wrong with being rewarded for doing the right thing,’ he added.