NEW YORK (Reuters) - BlackRock Inc. BLK.N, the world’s biggest money manager, has made a radical shift in the way it pays its retail mutual fund salespeople in the United States, a top executive said.
Rather than pay a percentage of the gross sales made through scores of brokerage firms, independent financial advisers, banks and insurance firms, BlackRock is using a “net” number that better reflects the profitability of the sale, Frank Porcelli, head of the fund company’s U.S. retail business, said at the Reuters Global Wealth Management Summit in New York this week.
“I think we are ahead of almost every other firm in the industry in doing that,” said Porcelli, whose troops sold $7.5 billion of BlackRock mutual and exchange-traded funds in this year’s first quarter. “I think the industry has to move in this direction.”
The compensation switch, made at the start of this year but previously unreported, addresses a hotly discussed issue among fund company executives. For years they have complained that salespeople were getting paid for fleeting revenue because certain sectors of investors hold funds for only a short period, robbing the companies of long-term asset management fees.
For example, advisers at brokerage firms tend to be high-volume traders of funds shortly after clients grant them discretion to manage their portfolios, according to industry statistics.
The fund companies also say it has become more expensive to sell through individual brokers and advisers, but they feared being the first to change the pay formula and losing salespeople to competitors.
“There has been a lot of talk about whether there was a better way to do it, but gross payout remains the standard,” said Rick Ledbury, vice president of data services at the Money Management Institute, a trade group for fund companies. “BlackRock is a huge player in the space. People are obviously going to take notice.”
In a poll of members in late March and early April, 96 percent of respondents said they used gross sales as their primary compensation driver. Almost half of those, however, said they used some “net” profit element in the calculation.
Porcelli said “a substantial portion” of BlackRock compensation now takes into account how long funds are held and other elements that contribute to the company’s profitability.
“To incent someone to get a dollar of business and have the buyer hold it for three weeks is not good business for anybody,” he said. “We want them to focus on people who are buy-and-hold investors, people who are using our products the right ways.”
BlackRock pays its executives on net metrics, so putting salespeople under a similar formula is “a good alignment of interest from my perspective,” Porcelli said, adding that his sales teams have taken the change with relative calm.
“We have a lot of credibility with them,” he said. “Our goal is to attract and train the best talent in the industry and pay them at those levels.”
(For other news from the Reuters Global Wealth Management Summit, click here)
Reporting by Jed Horowitz; Editing by Leslie Adler