Remote Brokers Could Reshape Wirehouse Real Estate, Management, And Compliance

Cecilia Nysing

August 19, 2021

As the remote-work era shows signs of enduring long after the Covid-19 pandemic, major brokerage firms are likely to rethink their real estate footprint, branch management structure and supervision. 

Long term, firms may shrink their rosters of branch and complex managers as they consolidate supervision and as fewer brokers need dedicated desks, recruiters and advisors speculate. At the same time, regulators and compliance officers will shift their scrutiny to brokers’ texts and voice communications with clients as a way to more closely monitor home or remote offices, according to compliance consultants. 

Evidence of the resulting reshaping of offices is already underway.

The demand for mid-level regional and branch managers, for instance, has dropped, two recruiters said. 

“Larger complexes at major wires have cut the need for branch managers,” said Mark Elzweig, a recruiter in New York. “Branch managers who’ve lost their jobs don’t seem to be connecting with other jobs–a sign of a weak hiring market.” 

The trend could intensify in the future as firms shift to a more “hotel” type of arrangement where advisors check in and out of office space and no longer need permanent desks. Firms could redraw the lines of “branch” management at that point to give some local leaders broader mandates, according to Bill Willis, a Palos Verdes Estates, California-based recruiter. 

“Why would they hire more managers?” Willis said. “I don’t think it means a lot of people losing their jobs, but the need to bring in more new people to those roles is certainly not overwhelming.”

Remote Regulation 

In another testament that the remote era is here to stay, regulators have also indicated they’re preparing for permanent flexibility. 

Robert Cook, Chief Executive of the Financial Industry Regulatory Authority, has begun discussing with the Securities and Exchange Commission staff extending the waiver on in-person branch inspections into next year, according to a spokesman for the industry’s self-regulator. 

Cook also said at an industry compliance conference in July that in 2022 he would like to review Finra’s supervision rule holistically and think about whether it could be updated to accommodate a risk-based approach to when in-person exams would be necessary. 

Chip Jones, executive vice president of Global Relay, a Vancouver-based company that provides technology to help brokerages with compliance, said Finra appears to have grown comfortable with its ability to keep watch on remote workers in the pandemic era and expects the regulator to also seek approval for more permanent changes to its rules, including what constitutes a branch office.  

“The pandemic has demonstrated that financial advisors can work remotely,” Jones said.

Regulators have adapted by shifting focus to brokers’ text communications or phone calls, for example, Jones said, and firms are likely to do the same by boosting archiving abilities and focusing more on those remote methods of talking with clients.  

Compensation

Some advisors are optimistic that they might see some benefits to their own wallet if firms are able to reduce their real estate expenses. Less time in the office may lead to pay raises for some advisors and assistants, according to only tentative discussions that a former Morgan Stanley advisor heard.

The former Morgan Stanley advisor, who also did not want to be identified, said after the pandemic began but prior to her departure from the firm this year, a branch manager discussed the possibility of compensation grids being readjusted in advisors’ favor if they agreed to give up once-coveted corner offices. 

“I was told that they were going to give higher payouts to people who work remotely,” the advisor said, noting that the discussions were early and tentative, and occurring mostly in high-rent regions, including New York and New Jersey.

A Morgan Stanley spokesperson declined to comment. The firm has issued no announcements about any potential changes or made any offers. 

Advisors’ support staff members may be the first category of employees who receive extra pay as pandemic conditions lift—in their case for coming in the office. Advisors’ assistants are reluctant to return to the pre-pandemic commuting grind, one of the recruiters said. To get the assistants to return—even on a hybrid basis—”a cash bonus is going to have to be offered,” he said. 

Tax Benefit

Advisors who man their own remote work stations may reap tax benefits, but that will likely depend on which state they reside and apply only to state income taxes.  

If advisors’ employers no longer provide them designated office space, they will be able to claim as a deduction in some states their home office (or costs of alternatively located workstations)  as an employment-related expense, leading to significant savings, according to Raymond Edwards, a national technical tax director at the technology and management consultant firm Aspiriant. 

Such deductions for employees are no longer allowed for federal taxes, he stressed. But advisors who are compensated as contractors—and receive 1099 tax forms—may qualify to claim the home-office deductions at both state and federal levels, Edwards said. 

“You’re providing your own principal place of business. That’s where the deductions become available to you,” he said.

Edwards recommends advisors who are employees and don’t live in a state with the deduction available consider negotiating with their companies about sharing cost savings as real estate expenses decline.

Advisors could tell their employers: “If I don’t come to the office, you don’t have to rent that space, it’s less expensive, so my payouts should be greater,” Edwards said.

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