Where will it all end? A major global bank is doing away with commissions as part of its advisor compensation, even where there is no regulatory impetus.
A major global bank is doing away with commissions as part of its advisory compensation model, even in areas where there has been no regulatory impetus to do so. The move, while being closely watched by industry peers, may simply be another nail in the coffin for commission-based services.
HSBC has told advisors in its US operations that it would be eliminating commission-based compensation and will be switching to a model comprised of a salary plus a performance-based bonus.
“HSBC introduced a new wealth incentive plan for its wealth sales teams in the US and other priority markets in January this year, removing all product sales incentives so our employees are rewarded on client experience, sales quality and values measures,” Neil Brazil, HSBC North America’s vice president and senior manager communications told WP in a statement.
“The plan is aligned with our aim of building long-term sustainable relationships with clients, based on trust and expertise, and with HSBC’s strategy and values. It is focused on delivering solutions to clients based on their identified needs, goals, risk profile and time horizon.”
The bank, which is headquartered in London, has been subject to a commission ban in its home market as the start of 2013. It was reported that it seeking to harmonize its global compensation model. As of the beginning of this year, advisors in the UK have been required to charge upfront fees to their customers rather than receive commissions from companies.
HSBC sold its Canadian advisory business to National Bank in 2011, so the move toward a harmonized compensation model will have no impact in Canada. One former HSBC advisor and manager in BC, who is now with National Bank Financial (NBF), said the move reflects two trends: a general move away from commissions and a drive by large banks to assert more control over compensation models.
“If you look at the investment advice that most banks are giving – not their IIROC-regulated entities but through their bank channels – you are looking at an area where the banks have control over compensation,” he said. “With CIBC Imperial service, as opposed to CIBC Wood Gundy, the advisors are compensated with a base salary and with some incentives associated with that based on success.”
Moving to a non-commission model, he says, is giving them an ability to better control compensation. “At the end of the day, since the banks have got into the full-service investment business, really only in the last 15-20 years, there have always been a lot of concerns [among the banks] about compensation within our industry.
“This gives the banks – which historically have been in a world where they have much more stringent controls on compensation – an opportunity to regain that control.”
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Although he doesn’t expect other US full-service providers to follow HSBC’s lead, the NBF advisor does suspect that many if not most are already running predominantly fee-based businesses. “I would [also] hasten to say that over the past few years most bank-owned investment dealers in Canada, for the first time, have seen most of their advisors become compensated more by fees than by commissions.”
Stephen Whipp, who operates an ethical investment advisory business in Victoria, agrees that the industry is moving away from commissions. He notes that his business is 75% fee-based, however he is concerned that elimination of commissions will drive lower- and medium-end investors into bank-only channels.
“My cynicism is that this is a play by the banks to gather more assets at a lower level. You can walk in any bank in Canada and if you are at a branch, not at their IIROC-level business, [the advisors] get salary and some form of bonus,” said Whipp.
“If [the banks] were thinking about capturing all of those investors with assets of under $200,000, and there is some significant coin there to be had in that segment, that could be more easily done [by banks] if we move into an environment where there is no commissions,” said Whipp.