The Grid

So yesterday I gave a brief description of the “Compensation Grid”. Today, I’m going to give an example of what a real grid might look like. Across the top, we have the gross commission generated by an individual transaction. Down the left hand side, we have the gross annual commissions generated by the broker.

For the broker who is generating about $350,000 in gross commissions, if he/she sold $5,000 worth of a DSC mutual fund which generates a gross commission of $250 for that transaction then that $250 would hit the grid in the 43% payout level. Therefore, the broker would get a net commission of $107.50 (43%) and the firm would keep $142.50.

$0 – $100 $100 – $200 $200 – $300 $400 – $500 $500+
$0 – $100K/year 10% 20% 20% 20% 20%
$100K – $200k/year 25% 25% 25% 25% 47%
$300k – $400k/year 35% 39% 43% 44% 49%
$400k-$500k/year 40% 42% 44% 46% 51%
$500k – $1M/year 42% 44% 46% 48% 53%
$1M – $2M/year 44% 46% 48% 50% 55%
$2M+/year 49% 51% 53% 55% 57%

You can see how “behaviour” can be modified based on how the grid is structured. In this particular case, high producers are rewarded (advisor retention) and low producers are given little incentive to remain where they are (that could mean motivation to sell more, or they quit due to lack of income). Further, incentive is given to placing trades that generate higher commissions as well (either by looking for more money to get the client to invest, putting them into a higher allocation to equities which generally generate higher commissions than fixed income products, or charging higher commissions on stock trades).

Another by-product of some grids is that by the end of the year, if you are near the next production level (i.e. you have generated annual gross commissions of $375,000 for the year), then by finding a way to generate another $25,000 in commissions in the final month moves you up a grid level. The new payout may apply retroactively to all your commissions for the year. For example, let’s assume that our broker has $399,999 in gross commissions for the year. If they ended the year at that level (and assuming all tickets were at the $500+ level) then they would have earned $195,999.51 in net commissions. If they made only one more dollar of commissions (gross) then they jump up a grid level and their net commission jumps to $204,000. So that $1 dollar in extra gross commissions was worth about $8,000 (net) to the advisor.

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 11 comments
  • Michael James

    Great post. I’ve heard a couple of mutual fund salespeople talk about the things that affect their commissions, but I’d never seen it in grid form before. I think it’s important for investors who choose to use an advisor to understand how they are paid. Sadly, many investors don’t even seem to be aware that advisors are paid out of their investment dollars.

    Where is the column on the grid for advisor bonuses for making money for the client? :-)

  • Million Dollar Journey

    Thanks for the clear explanation Preet. It’s pretty clear why a lot of FA’s push high MER and/or DSC products as they can make a lot more money than pushing low cost index funds. Talk about conflict of interest.

  • Preet

    @ Michael James: Grids like that are usually on the brokerage side. Pure fund salespeople tend to have one flat rate. However, there are advisors on the brokerage side who do nothing but funds – and that trend is probably growing.

    @ MDJ: There was very little incentive to talk about indexing until a few years ago when index funds started being offered with trailers and DSC options – although most advisors are not aware of this.

  • EconStudent

    I have read that on redflagdeal forums that FA get paid 65% to 85% of the trailing commissions from the mutual funds sold. According to the grid, it seems to be much lower. I am wondering how does the trailing commissions work in the instance of the grid.

  • Preet

    @ EconStudent: The grid that I showed was for brokers. MFDA licensed reps tend to have higher payouts and usually have only a one dimensional grid (i.e. only dependent on annual production). Trailers and upfront commissions would almost always fall into the same grid slot. Also note that the grid I posted for brokers was only a sample.

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