7/3/14

Hey guys, Andy had asked me a while ago to do a blog on PWM, so I figured I'd give it a whirl despite this forum being mostly interested in IB. Most of my partners are out of town so the workload this week is particularly light and I'm not going on vacation until tomorrow.

I aim to cover several areas over multiple blog posts, so please give me ideas for content in the comments or send me a PM. The topics I know I'll address are as follows:

  • history of the industry
  • where it stands today
  • day to day responsibilities
  • compensation, titles, etc.
  • common misconceptions
  • breaking in & exit opps
  • differences between wirehouses and private banks

Please give me feedback on what you want to see, topical, length, whatever. I can't promise how much time I'll be able to dedicate to this after July, but feel free to ask any questions below.

Quick background if you don't know already: mid/late 20's, one of 4 partners on a team at one of the big 3 wirehouses.

THEN & NOW, WHAT PWM IS AND WHERE IT CAME FROM

I'll spare you the details of how the stock market began and the beginnings of NYSE, you all have Wikipedia just like I do. Essentially my industry exists because some wealthy people wish to defer investment decision making to one person/team. This is how it works now: we work with people who are intellectually capable (for the most part) to manage their own investments, but have no desire to dedicate any time or energy to it. You would be surprised at how many wealthy people have zero interest in managing their portfolios, they would rather spend time & energy finding a trustworthy individual to do it, pay them, and then go to the beach.

There are also those who do not have the intellectual or emotional wherewithal to handle their investments. They may be fine savers, but may also be too chicken shit to buy/hold during bad times, sell during bubbles, and hold when there's noise. Also, many people do not understand how stocks work (the concept of multiples of earnings, all else held equal if earnings go up and the multiple remains, the stock must increase; oversimplification sure, but this is a WSO blog, c'mon), or other investments for that matter. They understand THAT it is important to invest, but not WHY or HOW. Hence, people like me and my partners get hired.

A long time ago, in a boiler room far, far away...

Pre-1990 PWM was confined to stockbrokers, the industry looked very different. This was due to many factors but in my mind the most important factors were greed and access to information (or lack thereof). Before the internet was widespread, the only place to get quotes or research on stocks was from a broker (now called financial advisor or wealth advisor), and eTrade, Schwab, Scottrade et al did not exist, so you had to buy stocks through a broker. If your broker was good (if you bought common names in the 80s/90s or sold munis, you couldn't lose), you did more business with him (yes, there are female brokers, but let's be honest, most are male), and built a relationship that way.

Most compensation was from trade commissions and the ROAs were much higher, because you had zero competition from discount brokers, online advisors (wealthfront/betterment), and proprietary information essentially. To clarify, trade commissions are where you buy shares of a stock and pay me a fee for doing so, but no ongoing fee for advice or to hold the stock. whether you bought or sold, you paid a fee. Brokers were therefore incentivized to get clients to have more transactions instead of prudently growing their assets, because commissions are based on share count, not dollars. if a stock tanked 50% and it's the same # of shares, you got the same commission, so there was a definite disconnect in how business was conducted in that what was good for the broker was not always good for the client.

The present time

Fast forward to today, and I will keep this short. Brokers offer all sorts of services: managed accounts, insurance, financial plans, etc. I won't get into the details too much on this (unless people ask for it in the comments), but basically the way clients pay us now is more for advice than it is for transactions. Transactions can take place anywhere, and my execution is no better than some online broker (except maybe for small caps & bonds). The way fees work now for the most part is clients pay an annual percentage fee based on the assets they have invested with us.

Another difference is in the types of firms out there. as recently as 10 years ago, there were dozens more wirehouses. Quick aside: a wirehouse is a traditional brokerage shop, usually having stock brokers & maybe a small research department. It was called a wirehouse because only firms of some size could have a "wire" into either NYSE or their home office so they could offer quotes to clients or potential clients. While there used to be many of these firms, today the big 3 are UBS, Morgan Stanley, and Merrill Lynch. other names like Smith Barney, Paine Webber, Bear Stearns, EF Hutton, Ferris Baker Watts, Morgan Keegan, Shearson, Dean Witter, and many many others have all been gobbled up or went belly up. Other notable companies are Wells Fargo Advisors, Edward Jones, Scott & Stringfellow, and many more.

Robo-advisors and the future of PWM as I see it

For those of you who don't know, there is a new advisor in town, and it comes in the form of robo-advisors like wealthfront & betterment. Essentially these services were created because some folks have always thought that the only value add an advisor has is in investment selection, that other services that are marketed (estate planning, cash flow planning, planning around executive compensation & concentrated positions), as well as those that are not marketed (proactively reaching out in advance of an issue, hand holding through crises, financial education), have zero value and are not worth the fees an advisor charges, regardless of the level. Also, the inventors of these applications lean strongly towards MPT, EMH, and asset allocation over security selection. They will ask you several questions about risk tolerance, income, assets, and spit out a few ETFs they think you should invest in, all passive (mostly Vanguard), and charge you a mere 25bps on accounts over $10k plus ETF fees of 15bps.

To the surprise of most, I think those services are neither a bad thing nor a threat to my business. For one, it will cause bad advisors to leave the business because they are truly replaceable. And while there will be several individuals who might have otherwise come on board to my practice but would now choose one of those services, my team has enough clients. What services like this will do is split investors into 2 groups: those who value advice and those who don't. Those who don't will never become clients, no matter how good your performance is, no matter how great your team is. That's fine by me, because those who don't value advice would make bad clients anyway, but I won't get into the weeds of that here. The thing is, wealthfront & services like it (I keep using wealthfront as the example because I've tried it, it was one of the first, and you don't need to disclose a bunch of personal info to try it out) are algorithms. They are formulaic (like MPT), they ask you a series of pre set questions and then spit out an asset allocation based on your income, risk tolerance, age, assets, and goals. Sounds good for 25bps, no? The problem is it only scratches the surface.

It will ask questions like "given an average return of 7.3% but ranging from +50% to -30%, how does that make you feel?" or putting that return in a multiple choice like "which of these is most appealing to you?" and "do you want growth, income, or both?" Well all of these sound like reasonable questions and they are reasonable questions, but they make 2 faulty assumptions: people know what they need (not what they want) and people understand the concepts and the math of investment returns. People mostly know what they want, but if someone says they want a low risk portfolio but they need a high return to meet their needs, that's not something a robot can guide them through. On the opposite side of that, if someone wants nothing but growth but they have high spending needs, a robot can't figure that out because the math doesn't work (withdrawals from a highly fluctuating portfolio usually doesn't work well).

I could spend an entire other post on this and I've already written too much on this topic. To summarize, robo advisors are not bad, but they will never replace the value of a good advisor. They are a great alternative for someone who cringes at the thought of paying someone like me and they are probably ok for someone younger with not a lot of means. Once you get some assets and a more complicated situation (spouse, kids, aging parents, higher comp), you should at least talk to an advisor.

TITLES & COMPENSATION

As far as I'm concerned, there are 2 roles in PWM, those which generate revenue/support those who generate revenue, and those who consume revenue. Revenue generators include brokers and their support staff (assistants, you may see the title client associate, client service associate, it's all a fancy way of saying "assistant"). Revenue consumers include analysts, managers, receptionists, and back office people. PWM is the only business where your manager is below you (if you're a revenue producer of consequence), your leeway will depend on your branch and the culture of your firm, and most broker-manager relationships are very normal & respectful, but I've seen managers get fired because enough brokers didn't like them, something to keep in mind.

Brokers

Brokers' compensation (aside from rookies) is 100% performance based. Your salary is $0, but your cap is nonexistent. You earn fees from commissions on trades, fees from advisory accounts (percentage of AUM), and bonuses depending on your firm. Let's use round numbers to make this simple, taking a guy who has $100mm AUM and an ROA of 1% on average, that means his commissions are $1,000,000. Another way to say this is his "production" or his "gross" (short for gross revenue) is $1mm. You'll hear the words production, gross, revenue, gross revenue, and commissions used interchangeably among brokers, it all means the same thing.

Wirehouses will take out 50-65% of this depending on tenure with the firm, level of production, product penetration, and growth. Independent firms (like LPL Financial or Raymond James) will take out 10-30% but you have to pay all of the overhead (office rent, staff salaries, etc.). I'll stick with wirehouses for now since I don't know much about indy shops. At a firm like mine, a 40 year old FA with 15 years of tenure with the firm grossing 1mm would have about a 55% haircut on his commissions. Not counting for other things like staff bonuses, this means his take home pay pretax is $450k. I'll get into the weeds of this a little further along.

Staff & Managers

Support staff will get a guaranteed base salary determined by management, these start at around 30k if fresh out of college and cap out around 60-70k depending on your metro area (probably closer to a 100k cap in NYC/SF). Support staff who are tenured and will be with their broker/team for a long time will usually get a percentage of revenue, albeit small (we'll use 1% to keep it simple). So a broker doing $1mm will give his assistant $10k in commissions, subject to taxes, firm haircut, etc. Some teams do more, some don't at all, we comp our senior assistant as a % of revenue, she'd rather participate in the growth of the business since her salary by itself takes care of her needs.

Managers get a salary paid for by the firm. Some managers are also brokers, so they get commissions plus salary, but to keep their focus on management, most wirehouses cap their revenue (something like $200k). I'll talk about the path to management in another post but I don't know much more about management comp. Same goes for back office & other branch employees not assigned to a broker (minus the revenue part). Comp here varies, someone in treasury will certainly make less than someone in debt syndicate.

Analysts, PM assistants, really anyone helping with investments but not selling

Analysts/PM assistants/non broker investment people are salaried, with one important difference. Your salary is determined by your BROKER, not the firm. This is a very important point I make because many folks come to me asking how to get into this business but they don't want to sell. Analysts are revenue CONSUMERS, meaning your comp is capped, and you're easily replaceable by outsourcing. I'm guessing most of the interest in this forum is on being an analytical type, not pounding pavement looking for clients, you'd rather sit inside, read research, manage money, etc. I'll explain why this doesn't work all the time in PWM.

Let's use a real live example. Let's say your team is huge and you manage 1bn. Let's say you're awesome and your ROA is 75bps, so your production is 7.5mm. a team that large (assuming one main broker) will probably have 4 staff (salaried + revenue share), and 2 analysts/junior brokers. let's say you pay each of your staff 1% of revenue, and your cut is 50% of gross, we're down to 46% of 7.5mm (50% firm haircut + 1% to staff * 4 staff = 54% off the top). The pot is now at 3.45mm. Let's say you split the 450k between the analysts or do 250k to one, 200k to the other, whatever. Possibly add in a revenue share of another $500k between the two and the pot is now down to 2.5mm for you, pretax mind you.

The average haircut on a professional money manager at my firm is 12bps per dollar of commission. if you're paying 2 analysts a total of $950k on production of 7.5mm, you're paying out 12% of your commissions to people who can be replaced for 12bps. These numbers were slightly manipulated to make you get the point, but here's my advice to anyone wanting to be a research analyst, investment analyst, or any non-sales and non-support role in PWM: do the math. There's only a limited number of teams in this space generating the kind of revenue that needs an analyst, and you have to realize that while there are opportunities and the job security is great, there aren't an infinite number of PWM teams looking to hire analysts, and your comp will be capped unless you become a revenue producer.

Titles

Finally, on titles. Every firm has internal titles (corporate cash wealth management advisor, stock plan services director), but I'll simplify it: it's based on revenue for the most part, other titles are functions of that advisor's clientele. The haircut will vary depending on the level of production.

  • Managing Director: 2.5mm and up
  • Director/Executive Director: 2-2.5mm
  • Senior Vice President: 1-2mm
  • Vice President: 500k-1mm (some firms have First VP at the 750k-1mm level, meaning VP is 500-750k)
  • Associate Vice President: 250k-500k

Again, please ask questions, give feedback, and request content in the comments below.

Cheers,

Brofessor

Comments (60)

7/2/14

Good stuff, always nice to see some more PWM insight.

Our firms top grid payout is 47% and titles are as follows:
MD 8MM+ (over 3 years)
ED 4MM+ (over 2 years)
SVP 1MM+
First VP 750M+
VP 500M+
AVP 400M+

Seriously, everyone has a title and is a little ridiculous. There are plenty of bonus opportunities too, ranging from hitting revenue or AUM goals to having a certain percentage of your book in SMA accounts etc. The sky is really the limit

7/2/14

Great post - have been considering PWM/PB for a while and love seeing fleshed-out insight.

Do you have any insight on advisors/managers who eventually leave a large wirehouse to start their own firm? Obviously you'd need a strong book before striking out on your own, but for those who do have a substantial book, how difficult is it to spin out and create your own firm? Alternatively, I know ML/MS have small branch/satellite practices run by a handful of staff. Do they work with relative independence (only using the wirehouse as a custodian, per se), or are they still heavily governed by their overarching bank?

I've also heard the advice that one shouldn't enter PWM straight out of college since it's such a relationship-driven business. Thoughts on that? Would it be better to transition out of b-school, or perhaps even later in life when you have U/HNW connections you can bring in?

Possible to get a FA position straight out of college, or would you need to enter as a CSA first and then move to an FA position?

And excuse my ignorance - what exactly does a manager do? Are they the ones who actually execute the trades / move the money?

Currently: clinical psychologist (in training)
Previously: investor relations (top consulting firm), M&A consulting (Big 4), M&A banking (MM)

7/2/14

FA/FP/broker, it's all the same. You may see "Wealth Management" instead of "Private Wealth Management," but PWM seems to be the forum standard here, so I'm using that. A few firms (Goldman, BoA, JPM, Citi, Wells) have "private wealth" divisions but those are traditionally the private bank/trust company model, which I'll do in a different blog post. Morgan Stanley has a PWM and a WM arm, the comp structures are identical, MS PWM was simply the original wirehouse arm of Morgan Stanley & Co., whereas MSWM is a combination of Dean Witter and Smith Barney (Smith Barney vet, so I know this side well). Merrill has the Private Client Group, which is similar to MS PWM in that their minimums are higher but the same comp structure. Not to be confused with US Trust, the private bank arm of BoA, different business model altogether.

I have a buddy who's independent, it's not hard to get started but it's hard to maintain. Firms like Wells Fargo's independent channel, LPL, Raymond James & Commonwealth recruit constantly and ask teams like us to branch off and go independent because the payout is better, but the real reason people go independent in my opinion is if they offer more limited products that require less oversight (thus making the firm's haircut silly) like annuities & REITS, they're fed up with their firm (lame reason), or they have a ton of small relationships on which they're not getting paid at a big wirehouse (the big 3 pretty much won't compensate you on families worth less than $250k, $1mm in some cases). managers will rarely leave a wirehouse voluntarily, the revenue is too sticky (meaning their bonuses are largely guaranteed). more often than not it's the parent firm getting rid of layers of middle management (regional guys go into the branch, pushing out branch guys, etc.) and the overall headcount decreasing.

my branch has over 30 brokers and probably 20 or so staff. we are independent of firm governance as far as I'm concerned. of course we have compliance like anywhere else, but it's not like the days of old boiler rooms where they'd say they have $20mm of autocallables on the desk and we need to unload them on the clients. my team doesn't even sell my firm's products, we either pick individual securities on our own or use 3rd party managers.

what all of the firms will do is incentivize you for doing high margin things, like structured products & banking. they'll do it a clever way by adding a % or 2 to your payout. so an advisor who would've otherwise gotten 48% might get 50% if he closes 5 mortgages in a year or something. 2% of $1mm is $20k, plus you get commission for the mortgage, so basically the governing firm is paying it forward, knowing they'll make that money plus some in interest over the years. I will say that despite every firm's efforts to push banking products onto its brokers, they realize if they are too aggressive, brokers will walk. I don't feel the pressure at all.

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

7/2/14

Awesome, thanks for the in-depth reply. In terms of payout, do any of the smaller firms use a fee-based/fee-only model? Or do you pretty much need to be an independent advisor to go fee-only?

Also had a couple questions in my first post that I added after you replied, regarding getting into PWM as a career. Would love to see a more in-depth post regarding recruiting/breaking in. Sorry for bombarding you with silly questions!

Currently: clinical psychologist (in training)
Previously: investor relations (top consulting firm), M&A consulting (Big 4), M&A banking (MM)

7/2/14

will address breaking in in another blog post, that's not a simple answer.

fee only is a term that small shops use to try to poach clients from firms like mine. it basically means they can't take a commission, which really just means they can't address 100% of the clients' needs. insurance policies REQUIRE you to take a commission, our PE, HF, FoF, and managed futures offerings (alternative investments are important for the wealthy for many reasons) REQUIRE you to take a commission (can't charge an ongoing fee). where we can, we choose to charge a % of AUM, but in some cases, it's just not possible. I love the concept of being on the same side of the table as your clients, because like "fee only" advisors, there are no lockup periods with managed money, no surrender fees, nothing. you pay as you go, you can walk anytime. /soapbox

to answer your question more directly, yes, some smaller regional/non wirehouse firms use a fee-only model, but don't get sold on just that, fee-only means 2 things: no commissions (fine by me), but limited product offerings. no wirehouse uses fee only, not even the smaller ones like Stifel or Baird.

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

7/2/14

thebrofessor:

will address breaking in in another blog post, that's not a simple answer.

fee only is a term that small shops use to try to poach clients from firms like mine. it basically means they can't take a commission, which really just means they can't address 100% of the clients' needs. insurance policies REQUIRE you to take a commission, our PE, HF, FoF, and managed futures offerings (alternative investments are important for the wealthy for many reasons) REQUIRE you to take a commission (can't charge an ongoing fee). where we can, we choose to charge a % of AUM, but in some cases, it's just not possible. I love the concept of being on the same side of the table as your clients, because like "fee only" advisors, there are no lockup periods with managed money, no surrender fees, nothing. you pay as you go, you can walk anytime. /soapbox

to answer your question more directly, yes, some smaller regional/non wirehouse firms use a fee-only model, but don't get sold on just that, fee-only means 2 things: no commissions (fine by me), but limited product offerings. no wirehouse uses fee only, not even the smaller ones like Stifel or Baird.


Interesting. I have a few financial planner friends who swear by fee-only, so it's great to hear opinions from the other side.

Currently: clinical psychologist (in training)
Previously: investor relations (top consulting firm), M&A consulting (Big 4), M&A banking (MM)

7/2/14

it definitely makes the most sense for the advisor and the client as far as conflict of interest mitigation (client) and having predictable compensation (advisor), but it's by no means the holy grail to doing right by your clients.

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

7/2/14

It strikes me that PWM is a very hard industry to break into as I've had many people tell me stories of high first/second year asset gathering (hurdle numbers may be the correct term?) requirements than end up flushing a vast majority of incomers into the field. Are those one-off experiences or people being generally bitter about a lack of success in gathering assets? I can never really tell with PWM because so much crap gets thrown around about it, especially when you are first looking at careers.

I remember when I was interviewing for a place they had me, for the final interview, put together a list of close family or friends which would have assets that I could bring in either with me or not so long after. Needless to say, It didn't sit with me very well the way it went down. It could have just been where I interviewed, or maybe that is fairly common I simply don't know enough which Is why i'm very interested in your perspective. I've always kinda viewed wealth managers in a way where there are about five of them out there like you who are truly wealth managers who are quite good at what they do and another 50 that are just.. well.. mediocre at best.

7/2/14

I'm biased in that I think our team is very good, I'll address all of this in my post about breaking in, moving up, and "exit opps." I will say you've mostly got it right, but I'll flesh all of that out in a separate post. thank you for your interest. I'm getting the feeling that everyone wants to see something about breaking in moreso than they want to see differences between PWM and PB/misconceptions of PWM.

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

7/3/14

thebrofessor:

I'm biased in that I think our team is very good, I'll address all of this in my post about breaking in, moving up, and "exit opps." I will say you've mostly got it right, but I'll flesh all of that out in a separate post. thank you for your interest. I'm getting the feeling that everyone wants to see something about breaking in moreso than they want to see differences between PWM and PB/misconceptions of PWM.


Definitely interested in the breaking in portion of the blog as well as something dedicated to the differences with PB and how to get into PB.

"Now go get your f'n shinebox!"

7/3/14

will start writing that today. I've never worked in PB so I have no idea on how to break in. I know how it works, just have no idea about hiring.

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

7/3/14

thebrofessor:

will start writing that today. I've never worked in PB so I have no idea on how to break in. I know how it works, just have no idea about hiring.


That would still be greatly appreciated. Outside of Credit Suisse and JPM PB, I'd venture a guess that a lot of it in the States gets lumped into the same category as PWM. Excellent thread either way. If I had any credits, I'd throw an SB your way.

"Now go get your f'n shinebox!"

7/3/14

hey guys, not enough space to do PWM v. PB in the next blog, look for it to hit the homepage over the weekend. Will cover PWM v. PB in the 3rd blog.

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

7/29/14

Addinator, unlike Investment Banking, which is very diffifult to break in but relatively easier to ride the ranks assuming you have the stamina, Private Banking/Wealth Management is relatively easy to break in, but very difficult to succeed in. PWM/PB classically overhires and overfires their RMs/Bankers/FAs because one guy/girl could theoretically pay for the entire training class.

PM me for more in-depth info.

7/2/14

thebrofessor:
our PE, HF, FoF, and managed futures offerings (alternative investments are important for the wealthy for many reasons) REQUIRE you to take a commission (can't charge an ongoing fee).
Overall, this is a good post and thread, but I need to make a point of clarification on this point as it is not true. If you are set up on a fiduciary bank platform or are set up as an RIA, you can't charge a commission and must charge an advisory fee which is almost always an ongoing fee. You must charge a commission specifically because you are set up under the broker rules.
7/2/14

I might be misreading what you're saying but when selling those products at my firm (and I'd imagine at the other 2 as well), were forbidden from acting in an advisory capacity, hence the commission (and in some cases a tiny ongoing trail similar to a 12b1 fee).

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

7/2/14

The point is they don't sell them separately. They charge a fee for advice and generally it's based on AUM and is agnostic to what type of vehicle the client invests in (stocks, bonds, mutual funds, ETFs, or limited partnerships). So, technically, they aren't selling the fund they are advising or managing their clients assets and the hedge fund is a part of the investment program. They can't sell a partnership on a one off basis, as you need a security license for that. Not sure if I'm making sense or not.

Anyway, it's a relatively minor point and I don't want to derail an otherwise good conversation.

7/2/14

What DickFuld is saying is 100% correct. You are either acting in the capactity of a fiduciary or you are acting in the capacity of a broker and each capacity is held to a different standard. As a broker your only obligation is that your investment recommedation is "suitable" whereas a fiduciary needs to make sure that the interests of the client are placed ahead of both the advisor and the firm. Wirehouse firms have been skating around this issue for years.

Investment advisors for RIAs don't have a series 7 and cannot transact commission based business. Initally this caused some issues with insurance products and alternatives but this has been changing in recent years.

7/2/14

Good post.

7/2/14

wow great stuff, frontpage at ~830pm

WSO's COO (Chief Operating Orangutan) | My story | My Linkedin

7/2/14

I had a friend say that once you hit 50 million under your own management you are golden. Not sure whether that is true.

I think you should do a post on how to pick a good place. You mentioned that you do all the same investments as your own clients, that is a very good sign. Reminds me of the swiss system where the partners have unlimited liability and ALL their assets are tied to their institution. Amazing how few mistakes (none) they make.

I've seen a place put their clients into a 3x ETF as a long term investment, I shit you not.

7/2/14

50MM would be a fine lifestyle for my neck of the woods (southeast, tier 2 city), because at a ROA of 1% (hard to get by the way, nobody's book is 100% managed, but what the heck, we'll go with this), that's 500k gross, the payout on that would be roughly 40%, and you wouldn't comp your assistant much on a book that size so your take home pretax would be around 200k. for some people, that's enough. for others, it's not. depends on the lifestyle. will go more into this (client size, how many clients, etc.) in another post, but that's an arbitrary figure and because of cost of living, I doubt that works in any expensive city for someone with a family.

about picking a good place, I'm not sure what you mean, but I'll assume you mean pick a good firm. I think the "eat what you cook" mentality is more having a good moral compass than anything else, not necessarily your firm. my firm lets me do what I want, as do the other 2 big wirehouses. there are unscrupulous guys at my firm, and there are unscrupulous guys at Acme Financial in Podunk, USA, it's more about the team. We have the mindset that while every client is different, we have a limited menu of "best ideas," we might have 1 or 2 merger arbitrage managers we like, and 3 or 4 bank stocks we like, so across our book and in our own accounts, you see many of the same names, albeit in different percentages. that's one huge misconception I'll flesh out more later (everyone thinks we're cookie cutter, when really it's just our best ideas).

If you mean pick a good location, I'm way off base but that is also critically important.

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

7/2/14

Good stuff bro.

7/2/14

I'm personally curious as to the differences between firms, not for my personal career but because I've seen and heard many different versions of the story. For example, I had friends back in my 20's who went into the advisor training programs for the big names-MS, Merrill, PaineWebber (when they were still independent), etc-where they basically gave the guys a desk and a phone and told them to build a book of business. I think only two made it and that was because one had huge family connections (dad was the Sr. Partner of one of the largest law firms in the city and his brother was a sports agent with big clients) and the other had good family connections and inherited a guy's book who retired (that I believe came from his dad's friendship with the guy) although he worked very hard, broke off and formed his own money management firm and has $2.5B AUM now. I don't think any of the other guys even made it a year and were absolutely miserable. There was no minimum account size and they basically trained the guys to sell with very little training on the actual investing side of the business. I only know this because two of my very good friends did it and I got to know some of the guys they worked with and most failed and hated their lives doing it. I know the guys who made it made it big and were bringing home a lot of money but I felt like there was no way to make it unless family connections existed, or if they were assigned to a team with a decent book before they even arrived.

Then there are people I know who have gone to the likes of Goldman's PWM division (or whatever they call it) and it seemed like they were directly assigned to a team, went through investment training (not just sales training) and weren't really expected to bring in new business, at least at first I think. And minimum account sizes were something like $10 or $20MM.

I suppose it could be the difference between the historic retail stockbrokerage roots of the former and the white shoe roots of GS (I know a Jewish firm wouldn't have been traditionally a white shoe firm), but wouldn't at least MS have that type of wealth management with $10-$20MM minimums? Or am I confusing PWM with private banking? Or do most of these firms have separate divisions where one is the descendant of retail brokers and the other is a division that's always focused on UNHW's?

Any thoughts/comments?

7/2/14

great questions, I think this fits into breaking in, making it & differences between PWM & private banking. I only have one meeting tomorrow, so I should be able to write some then. I'll schedule the post for over the weekend since I hope everyone takes a break from WSO to enjoy our nation's birthday.

I will say my experience with GS PWM is not firsthand, I've never interviewed with them, nor interacted with anyone directly on their team. We've been in competition with them and talked to some of their clients (sometimes mutual clients), but never had firsthand interaction. thanks for your curiosity.

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

7/2/14

Thanks for doing this.
You mentioned some online wealth advisors such as Wealthfront/Betterment. Where do you think PWM is heading due to the surge of these companies? Are they taking away clients from the more traditional PWM firms or are they targeting a more niche market(younger, not super rich).

7/2/14

betaa:
You mentioned some online wealth advisors such as Wealthfront/Betterment. Where do you think PWM is heading due to the surge of these companies?

Also interested in this (and not just because I have funds in one of them).

Currently: clinical psychologist (in training)
Previously: investor relations (top consulting firm), M&A consulting (Big 4), M&A banking (MM)

7/2/14

Excellent post Brofessor. I had been thinking of writing a post on PWM myself but am happy that you beat me to it and did such a great job explaining the different areas of PWM.

7/2/14

Really enjoyed this post, thank you @"thebrofessor". From all I have gathered on this forum around PWM, it sounds like it would be a great industry to switch into in your mid to late 20's. I imagine in your late 20's is when you can really start building credibility and your AUM follows that. Obviously, any sort of family connections would help, too.

7/3/14

Thanks guys

@"chicandtoughness" and @"betaa" main post updated with my thoughts on robo advisors. I trimmed it down significantly (started turning into another blog!), so PM me if you have any other specific questions

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

7/3/14

Excellent post and nice to ser how PWM works different than PB (I'm in a analyst program in a BB for the PB department).

junior people here can and generally succeed, since we are not expected to bring assets, not until you are an associate. But still there are other people in the platform to help you with that (the so called "hunters").

Id say the biggest difference between PWM and PB is that PWM will focus more on implementation ideas/brokerage and PB, on wealth planning.

If you need insight on your future post fot PB send me a PM.

7/3/14

Good post, thanks for sharing!

7/3/14

Thanks for the great information, definitely the best explanation i've ever read on the industry.

Where exactly does Northwestern Mutual stand in the industry in comparison to the big 3 and other companies?

7/7/14

They have a bad rep because they recruit college kids to cold call for them, and the general perception of them by wirehouse brokers is all they have is proprietary product and no "platform." I'm sure there are good brokers who do well at that firm, but most of our competition is against other wirehouse brokers, regionals, and occasionally private banks, so I don't have much experience with them.

Let me explain what I mean by platform more in depth: each of the big 3 is an investment bank at heart. They have top tier research desks, IB groups, M&A, S&T, and sometimes Asset Management (JPM & GS are the biggest in this space, but their PWM is more like a private bank, I'll explain more later). Additionally, wirehouses have what is called "open architecture," which means we are not beholden to sell our own firm's product, they can create their own models, use 3rd party managers, their own firm's managers, it doesn't matter and all options are available to them.

It's been my observation that insurance companies are especially bad with proprietary products (State Farm selling you State Farm mutual funds, and they can't offer anything else), so most wirehouses lump NW Mutual in with that stigma. If we were interviewing for an analyst/jr. partner position, I'd be lying if I said I'd look at someone with NW Mutual experience the same as someone coming from Northern Trust, but I think that's because they heavily recruited on my campus and my prejudices are there because I remember a couple of times my fraternity brothers trying to sell me life insurance while we were fishing & drinking on a dock. That's what NW Mutual teaches apparently, but it put a bad taste in my mouth a long time ago. All of that said, don't get too caught up on firm names, concern yourself more with having resources (research, trading, big back office) and open architecture, and have as many informational interviews as you can if you're looking for jobs.

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

7/3/14

@"thebrofessor" Hey, why did I click on your part 2 link in my inbox and it said access denied due to spam or a violation of TOS? You trying to sell Amway again on WSO?

7/3/14

Ah, I tagged you in it but it's scheduled to go up Saturday so the link is dead right now.

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

7/3/14

Great post. I was curious about PWM since there isn't much out there on the subject. The info you shared is really helpful. I have a few questions.

How long does it take for a FA to build up to the numbers you're talking about (around 1mm)?
What type of education is necessary to break in? BSBA and/or MBA, or just BSBA with a CFA?
Are there more prestigious firms to work for and does that actually correlate to more business for a FA?

Thanks again and I'm looking forward to your next post.

7/4/14

bennett97:

Great post. I was curious about PWM since there isn't much out there on the subject. The info you shared is really helpful. I have a few questions.

How long does it take for a FA to build up to the numbers you're talking about (around 1mm)?

What type of education is necessary to break in? BSBA and/or MBA, or just BSBA with a CFA?

Are there more prestigious firms to work for and does that actually correlate to more business for a FA?

Thanks again and I'm looking forward to your next post.

It could take anywhere from a few years to never. It really depends. You have to think, how will you get clients? It's not easy to get someone to hand you over 1mm dollars....especially when you are young. And then, how will you get a bunch more people to hand you over their life savings. You basically have to build trust with people who have the money to invest. So how will you build trust with these people with the money to invest, not trust with the Starbucks barista or trust with your stoner buddy, but trust with someone who has worked for their whole life (most clients are older) and has a lot of money, it's tough, and that's why you see a lot of people from well off families in the business because they know a lot of other well off families and they have trust as friends before the business relationships, then referrals.

I've seen just bachelors, lots of mbas, CFA, cfp, it all comes down to getting clients, so if an mba helps build your network to get clients then OK, but ultimately you get whatever credentials you think you need to get clients. Our top producer who had a book that generated 40mm+ in rev (one of top advisors in country, though not on lists because they rarely include PB) had only bachelors, I think he may have been a cpa at one point but not sure.

Yes there are more prestigious firms. Does that correlate to more business....now that really depends. For some yes, for others no. If your clients are all old family friends, golf buddies, country club friends, ex co workers, the firm may not matter as much. If you do a lot of cold soliciting the firm may matter more.

7/7/14

It really depends. Of those who succeed and end up doing really well, I'd say expect something like 10mm in new assets a year on average with about a 70-80bps ROA. So you know, it'd be incredible for a brand new broker to get 10mm in assets the first year, so what's more realistic is to get 3-5 million for a few years and then get more in subsequent years. So going by my math, 10-12 years, but there's no typical growth pattern. I know a guy personally in the business who generates >3x that and has only been around for 10-12 years. There are guys in my office who've been at it for >15 years and still haven't cracked 1mm. If you're gung-ho about growing AND you're good, you can get there faster, but I think what happens is people realize they can work 30-40 hours a week and take home 2-300k a year (which is a great living in my part of the country), and suddenly growth becomes less important.

No one type of degree works well. I knew a guy who went to HYP undergrad, studied econ, and failed miserably. My mentor didn't even graduate college (I interned at MS/ML/UBS in college), there's no formula. What matters more than education is passion about investing, being a great listener, knowing how to sell, and having thick skin.

I'm biased, because I work for what I think is the best firm in the business. The firm you work for probably won't translate to more business unless you're competing for institutional business like endowments, pension funds, stock plans, stuff like that, but for families, I don't think it matters very much. One thing I like about my firm is people have heard of it and we have a good rep; when I'm at events or out and about, I don't have to explain what my firm does, because people know the name. @"ArcherVice" does this answer your question about "picking a good place" or am I off base?

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

7/7/14

Yes it does!

7/4/14

Question on comp - in this sort of relationship-based business, how much of your post-tax dollars do you have to plow back into revenue generation eg strip club bills from a night out with a client that you can't expense on your corporate amex and so go on personal account?

For anyone who has to work in sales generation, I think this is a critical issue in working out what is the real amount banked each year.

Those who can, do. Those who can't, post threads about how to do it on WSO.

7/7/14

Great question, and I wish I had a more detailed answer. I don't have to forfeit much in the way of personal after-tax dollars, my firm gives us a healthy expense account based on the size of our team. The types of people we go after wouldn't want to go to a strip club, but what might happen is having to eat a bar tab (most firms require you to have food on the bill in order to expense a meal), but overall it's an insignificant amount. Can't speak for other firms, but I know the big ones generally give you enough for travel, entertainment, gifts, etc. such that you don't have to eat many expenses.

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

7/4/14

I worked at a BB PB and my father is a financial planner for an independent broker dealer. It's been very interesting to see the differences in the business models. My dad runs his own shop with his own name and pays for all the overhead, while paying a cut to the BD for compliance and legal support, the rest is really all him. He takes basically all clients and focuses on 401k rollovers for retirement with his average client having ~750k-1mm portfolio he has ~600 clients. He advises 401ks which are housed by the 401k plan provider depending on the client's employer. He does not get paid for advising these potential clients on their 401ks but the hopes is that when they retire, they house their IRA rollover with him. Also, people open other accounts such as brokerage, college savings, IRAs. He builds the relationship by advising the 401k for free...I believe it may even be a law that he cannot charge for advising them on their 401k....not sure about this. He has relationships with large companies who have thousands of employees and he is one of several advisors they recommend their employees to use. These large companies have hundreds of people retiring each year and thus he has a constant flow of new business. Further, you can become the ...I forget what its called but basically in charge of the 401k plan for the company....and that can be very lucrative. He is one of few advisors who is commission based which basically means he makes a good chunk when people first invest with him, but ongoing fees are very low, ultimately for his clients (retirees) it results it much less fees (bad for him) because they don't make a lot of moves in their portfolios also with such small investment amounts (compared to rich clients) they can't move their funds around a lot anyways because the fund management fees would destroy them.

PB was very different, my view is that if you want to be a producer....pb f*cks you over and the payout is tiny compared to wirehouses, though you don't pay for your analysts/associates/assistants and you get a lot of investment guidance. Now, if you don't have a network, can't get clients (PB can help in some ways), or don't want to be a producer...then PB may be a better option. But at wirehouses or independents, you basically run your own stuff (to varying degrees at different places), at PB....you will have to kiss ass and hit performance metrics for the rest of your life, rather than collect a % of your revenue whether or not it increases, oh and they are not your client's....they are the firms and you won't be able to sell your book. Again, others experiences may vary, but this is what I saw.

7/4/14

@"thebrofessor", how does the comp work out based on AUM?

7/7/14

Depends how you run your practice, we bill like a AM shop (% of assets with no hurdle) but work more like it's an ongoing retainer. So if you have 100 clients with $1mm invested with you ($100mm AUM) and an average fee of 1%, your total revenue is $1mm, and depending on your firm you might see 40-50% of that in comp. That's an overly simple example but it should answer the question. If not, let me know.

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

7/4/14

@thebrofessor

2013-2014 have been unbelievable years for the stock market, LBOs, and M&A activity.

I'd like to liquidate my portfolio before the bubble pops, and they say mid-2015 is when shit will hit the fan with interest rates.

Any wisdom on your part as to when people should start taking their money and run?

7/7/14

I don't think the entire equity market is in a bubble. I think certain stocks are bubbly (AMZN, TSLA, NFLX), and certain asset classes worry me (high yield, long dated bonds, gold), but on the whole, we're not in a bubble. See Dr. Damodaran's post on bubbles (/blog/bubble-bubble-...) and you'll get the gist of how I think about bubbles. It's silly to look at valuation in isolation/irrespective of the current discount rate.

As rates rise, I'd expect valuations to compress and markets to go sideways (similar to what happened in 2011 from a total return standpoint), because right now we're not getting the revenue growth to support long term earnings growth. Sure, companies could continue to buy back stock, issue special dividends, and make acquisitions, but at some point you need to have sales drive the bottom line, and I think eventually the margin expansion will level out, multiples will contract, and we'll either go sideways or modestly down.

Not a time to head for the hills, but certainly not a time to be fully invested (full disclosure, I only own stocks & cash, I hate bonds for my personal account). What I'm doing with my money is taking some profits but remaining mostly invested. I wouldn't be surprised to see some 10-20% downturns, but I believe they'll be short lived. Keep some cash on hand to pick up these fallen angels.

summary: there is never a time to completely liquidate in my opinion. I say this because it is possible only in hindsight to step aside before major corrections, but in practice nobody does it with consistency AND gets back invested in time to capture profits, it cannot be done. Stay true to your school (assuming you're in the right school), take profits where appropriate, but never do a full 100% exit, you'll never get back in.

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

7/7/14

Good points.

Although I'm trying to remember this time when tech stocks were "bubbly", and what effect that had on the broader market. Oh well, last year's bonus on ZNGA call options it is.

7/7/14

When tech was bubbly value stocks were still cheap, so yes while they took a dive it was decidedly less pronounced. I'll take that any day.

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

7/7/14

delete

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

7/7/14

Great read for any prospective monkeys either wanting to know more about PWM or trying to break into PWM.

Awesome guide

7/7/14

Great stuff. Both the post and the many in-depth answers on comments. Would SB if I had any.

7/9/14

Great post, thanks for sharing. A few years ago I bookmarked a Forbes article that gives a solid overview on the differences between independent advisors vs. wirehouses vs. RIAs, etc. Here's the link, in case anyone wants some further understanding of the subject.

http://forbes.com/sites/advisor/2012/08/01/is-...

See my WSO blog

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"The only thing that interferes with my learning is my education." Albert Einstein

7/10/14

Good article.

I'm a student interested in being an investment analyst, possibly at an investment advisory firm. I was wondering:
What might be a common pay range for an analyst working for a broker (assuming NYC area where I'm guessing most of these jobs are, but let me know if I'm wrong about that)

And how is the workload (typical day, hours/week, flexibility, etc.?)

The article says that job security is good ("There's only a limited number of teams in this space generating the kind of revenue that needs an analyst, and you have to realize that while there are opportunities and the job security is great, there aren't an infinite number of PWM teams looking to hire analysts"), but that an investment analyst is easily replaceable ("Analysts are revenue CONSUMERS, meaning your comp is capped, and you're easily replaceable by outsourcing.").
If an analyst is easily replaceable, why is job security good?

7/14/14

thanks for the questions.

no idea on pay, sorry I can't be more helpful there. my example was completely hypothetical, I highly doubt there's a broker on the face of God's green earth that would pay an analyst as high as I indicated.

I've never been an analyst, so all of this is from observation. as far as hours, the 2 analysts in my office never work more than 45-50 hours a week, if that. as far as duties, there's essentially 2 kinds of analysts: investment analysts and the wearsmanyhats analyst (herein "other"). investment analysts will have typical duties: trading, research, reporting, modelling, idea sourcing, and so on. other analysts' roles tend to be less defined.

I've seen analysts who are glorified secretaries, doing admin work almost exclusively. I've also seen analysts who are more business analysts, helping grow the business but not responsible for bringing it in themselves, doing things like event planning, client meetings, investment proposals, and so on. what's most common is seeing some sort of hybrid, where an analyst is primarily one thing but will chip in with other things. what I imagine is the interest of people on this forum is being an investment analyst, and those are the ones I'm talking to specifically for this post (as far as being easily replaceable).

if a broker never changes his business model and employs investment analysts on his team, you will have a very safe job. your comp will be capped, but you will have a better lifestyle than analysts in other industries. in practice, brokers rarely change the way they do things unless there's some serious disruption in the markets affecting profitability (e.g. 2008). given that, their analysts will usually stay employed in perpetuity. hence the comment on job security.

about investment analysts specifically (since that's likely the interest of this forum), they're replaceable because their duties can be accomplished either by admin staff or by using the firm's resources. unless you run a closet Asset Management shop, analysts simply aren't necessary for investment functions. I say this because most firms will have plenty of resources for trading, research, due diligence, reporting, etc., making an analyst just extra overhead. while you are probably safe once you break in, I think it's important to know that this role can be easily eliminated.

does that answer the question?

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

10/7/14

Dear Thebrofessor,
I had a post regarding private wealth management in Iran that you had some opinions about. As long as two month has passed and negotiations over between Iran and west has been so far satisfying we are more determined to continue the path we have stepped in.Unfortunately I had to remove that post, but I really want to continue that conversation since I have some issues with the whole idea that I think you may be able to help me in. So if I could have your e-mail address I would really appreciate.

10/7/14

sent you a PM

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

12/14/14

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