Worker pay: A close up look at Financial Advisors

Worker leverage, without a union.

Workers get paid if the employer is hurt more than the employee.

I had a 30-year career as a Financial Advisor. I have up close first-hand experience with the struggle to get paid for one's work.  

I owe unions a debt of gratitude. I was brought up in a middle-class home, thanks to unions. The teachers union created a floor of wages that provided a support level for principals, and my father was an elementary school principal. 

I also owe my election as Jackson County Commissioner in 1980 in large part to unions. The local building trades unions opposed my candidacy and they ran TV ads endorsing my opponent. They were joined by the local Chamber of Commerce, which ran similar ads. Both sets of ads involved heavy-set men aged about sixty, looking at the TV camera and saying they knew they could work well with my opponent. The union guy looked right out of central casting as a thuggish "union boss." He read his 30-second script deadpan, so it came across as threatening. What each man said looked like classic "good ol' boy" cronyism; we are big shots in this county and we like Peter's opponent. Their well-financed endorsement of my opponent was the boost I needed. I was a fresh-faced 31-year-old. I ran TV ads in response, saying I would "stay clear of the powerful special interests." I needed the union to be my counterpoint. I won the election, notwithstanding being under-qualified, too young, too liberal, a Democrat running in a Reagan landslide, and disfavored by the local community leaders.  

Unions might be popular in general, but "union bosses" are not. My campaign was helped by their reputation for heavy-handed self-interested behavior--as referenced in yesterday's Guest Post. A certain amount of "thuggishness" is built into the job of representing workers in a negotiation, because the negotiation comes down to raw power--the employer's power to provide a job and income, or the worker's power to withhold work and cause pain to the employer. Strikes cause pain. Labor struggles get ugly. I saw that first-hand at my next job

Financial Advisor. I left politics after one term to see if I could make friends instead of enemies, and a secure income instead of a fragile one. I worked as a Financial Advisor at Morgan Stanley, and the predecessor firms that were consolidated into it. Brokerage firms provide the platform for dispensing financial advice, They also give a client a place to "bank" their investments in a single convenient place. The firms--Morgan Stanley, Merrill Lynch and a variety of lesser-known companies--provide research for the benefit of advisors and clients. The firms carry out instructions of clients and advisors to buy and sell investments. Advisors find clients in part by serving as a point of contact for the investment research and recommendations of the company. They give credibility to a young Advisor. They can be an anchor of non-credibility to a well-established Advisor, who is trusted far more than the company that employs him.

In the past Advisors earned revenue from clients from commissions on transactions. Now they earn them almost exclusively by charging an annual fee that bundles all services--advice, transactions, checking accounts, everything. Depending on the size of the account it might be about one percent per year, and less for larger accounts.  

As a Financial Advisor, I was an employee of the firm, although in practice Advisors act like individual entrepreneurs finding clients who valued our advice. In general, if a client paid $100 in revenue, the Advisor would get paid about 40% of it and the company would keep 60%, from which it paid its share of payroll taxes and health insurance which amounted to perhaps another 10%. Net-net the Advisor's cost was about 50% of the revenue paid by clients. The employer also provides office space, management supervision, research, transactions, legal services, and other services. Net profit per employee might be around 25% of the revenue brought in by the Advisor. It is more complicated than this, of course, with income streams for the firm coming from stocks loaned to short sellers, investment banking, and especially from interest the firm earns from cash balances held in client accounts. That is the business model: Advisors attract clients and get paid by the client. The firm shares a big piece of that income, plus gets revenue from holding the assets in house.. 

None of this is secret. If the reader is a client of a brokerage firm, and wondered how it all worked, now you know.

I soon realized that Advisors like me were in a constant struggle with our employer. The struggle was silent and covert--a kind of Cold War. The goal of the firm was to pay Advisors as little as they could get away with. Every little change in the "payout schedule" might mean only a few dollars here and there to the Advisor, but spread across 10,000 Advisors, changing a payout from 40% to 39.9 % means millions for the firm. Every firm is searching for little ways to adjust the formula, by counting only certain types of revenue but not others, but inserting thresholds, etc. There is every incentive for the company to "shear the Advisor sheep" a little closer--at yet they reach a limit. Advisors still get paid.

It is not out of generosity, or about "fairness," or valuing "stakeholders" in their business. It is because of power--power held by Advisors that balance the power of the firm. Advisors who are unhappy at a brokerage firm can move across the street to another firm or go independent, and history shows that most clients move with them. Firms traditionally tried desperately to stop an Advisor from moving. They installed "non-compete" agreements and Temporary Restraining Orders to keep Advisors from contacting clients at the predecessor firm. It was an ugly fight, filled with hypocrisy, since the firm claiming outrage that an Advisor might leave to go to a competitor was, secretly, urging other Advisors at that same competition to move to them.  Friendships are lost, and people make accusations of betrayal. 

There is a huge advantage in the struggle held by Advisors. Established clients like and trust the advisor more than the firm.

Advisors don't have unions, but they have the bargaining power that unions can give workers, the power to withhold their work and hurt the employer. The situation for Advisors makes the point about the power of unions. It requires a credible threat to withhold work and it has to damage the employer when it is exercised. In the Advisor case, one person can do it. In the case of a factory floor or grocery store or Amazon fulfillment center, it takes the collective action. The principle is the same: When the company needs the employee, and realizes it, everything changes. The employee can insist on getting paid a bigger share of the value the employee creates.