Rep production figures called misleading

IRVINE, Calif. — In the race to show the highest-producing sales forces, brokerage firms may be goosing the numbers. Numerous brokers interviewed for this article question the revenue-per-broker figures disclosed by the major firms. They say the numbers just don’t jibe with internal data they see on broker production. That’s because many firms add up total retail revenue and divide by the number of reps to get a revenue-per-broker number, not a production-per-rep figure. Total revenue includes items for which brokers don’t get paid, such as interest income, account and service fees, revenue-sharing amounts and income from other retail operations. Firms can also game their numbers by dropping off newer brokers and counting new recruits’ past production in current totals. As a result, the total revenue figure most firms report would be significantly higher than the actual gross production numbers at the same firms. “It’s just wrong” to report it that way, said a Smith Barney rep, who asked to remain anonymous. Smith Barney is the brokerage unit of New York-based Citigroup Inc. The rep, who was formerly a manager at another wirehouse, said it’s evident that all the major firms juice their productivity numbers. “They do it to make themselves look better. They don’t care if it’s misleading ... Everybody is racing to the million-dollar mark,” he said. “There’s no upside in bragging that you’ve got a bunch of low producers,” said a rep at St. Louis-based A.G. Edwards & Sons Inc., who also asked not to be identified. Beyond just bragging rights, though, there is an issue of whether the high figures mislead people, said Dennis Zank, president of Raymond James Associates Inc. in St. Petersburg, Fla., which has 1,060 employee reps. “When you sit down with a recruit, [if you] say, ‘We have one of the highest production [levels] on the Street,’ it gives the recruit the feeling that [they] will migrate to that sort of production,” Mr. Zank said. Raymond James Associates reports average production, as does Stifel Financial Corp. of St. Louis. “We get calls all the time from [analysts saying], ‘You guys can’t survive, because you’re not as productive as the big firms,’” said Ron Kruszewski, chief executive of Stifel. The firm reported average production of $430,000 as of June. As of July, the annualized production of Raymond James Associates brokers was $470,000, Mr. Zank said. The firm excludes from its calculation rookies with less than two years’ experience, veterans at the firm less than a year, and producing managers, he said.
Mr. Zank said if other firms followed a similar methodology, their numbers would be “a lot closer to us.” According to a May presentation given by officials of Richmond, Va.-based Wachovia Securities LLC about the A.G. Edwards merger, “annualized revenue” per rep at A.G. Edwards was $522,000 as of February and $688,000 at Wachovia as of March. Neither firm routinely discloses a revenue-per-broker number. “That’s B.S.,” the A.G. Edwards rep said about the half-million figure. Internal reports show average production of around $400,000, he said. “Seventy percent [of Edwards brokers] do less than $400,000,” he added. A Wachovia Securities spokesman, Tony Mattera, said the firm uses total retail revenue as a basis for calculating Wachovia’s numbers. “We do take pains to make sure it’s an accurate reflection of revenues generated” by financial advisers, either directly or indirectly, he said. A Morgan Stanley broker said his year-to-date production put him in the top 10% at the firm, “but that would be around the average of what [the firm is] throwing out,” he said. As of May 31, the New York-based company reported 12-month annualized revenue per broker of $814,000. Morgan Stanley calculates total net revenue divided by the average number of advisers for the quarter, including licensed trainees, said spokesman Jim Wiggins. The methodology is “standard industry practice and the best measure of the overall productivity of the business,” Mr. Wiggins said. In public filings, Smith Barney reported $748,000 in “annualized revenue per FA” as of June. Meanwhile, the Smith Barney rep said, the median broker produces around $530,000, while the average is about $610,000, he said. Margin trading and short sales are major sources of interest income for a firm but don’t count toward production, he said. Alexander Samuelson, a Smith Barney spokesman, declined to comment. Merrill is the one firm that shows its brokers a “revenue factor,’’ which shows how much revenue a broker is responsible for bringing into the firm. The firm’s revenue factors are typically 20% to 50% more than actual gross production, according to Merrill brokers, especially if they sell mortgages and lines of credit. The firm doesn’t routinely disclose per-broker revenue, but last November in an investor presentation, chief executive Stanley O’Neal said the firm led the industry with $761,000 in “net revenues per financial adviser.” Merrill officials did not respond to questions. ‘Apples to applesauce’ Industry executives who disclose production rather than total revenue are under some pressure to follow the wirehouses’ lead, industry observers say. Mr. Kruszewski said during an analyst call this month that he may have to use total revenue to make industry comparisons meaningful. Raymond James’ Mr. Zank said different methods of calculating average production will always make comparisons difficult. One of the “most abused” calculations, he said, is immediately adding a new recruit’s revenue to the total. “That’s comical, because it’s rare that an adviser gets up to speed that quickly,” Mr. Zank said. With different ways to calculate revenue, “at best, it’s an apples-to-applesauce comparison,” Mr. Kruszewski said.