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Morgan Stanley makes 'riding the calendar' less lucrative for brokers

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[April 26, 2014]  By Lauren Tara LaCapra

NEW YORK (Reuters) — Wary of brokers who make their money by "riding the calendar" of new stock and bond issues rather than patiently building the firm's wealth management business, Morgan Stanley <MS.N> is cracking down where it hurts the most: compensation.

Since April 1, Morgan Stanley Wealth Management financial advisers have seen their compensation cut by as much as 50 percent on sales of new issues to clients who use the firm primarily to get allocations of those securities. The severity of the pay cut varies, but some top earners are seeing payouts cut by half. The new system applies when more than 70 percent of the business from a client comes from those deals.

Morgan Stanley is hoping that a drastic cut in this kind of compensation will spur brokers to sell more products, such as mutual funds, loans and financial planning services, to those clients, according to several Morgan Stanley advisers.

At the same time, the bank is hoping the move could force clients who want continued access to hot IPOs to put more of their assets with the firm's wealth management business. Morgan Stanley has underwritten the Facebook and Twitter IPOs and is also expected to win the assignment for the forthcoming offering from Chinese ecommerce giant Alibaba Group.


Morgan Stanley spokeswoman Christine Jockle confirmed the change in the broker compensation policy. She said it was meant to ensure that new offerings were distributed more broadly across the client base.

Archrival Merrill Lynch, a unit of Bank of America Corp <BAC.N>, has not made similar changes to its compensation structure, a source familiar with the matter said on Friday. Wall Street recruiters said they think that only Morgan Stanley has made such a move among the bigger brokers.

While the change at Morgan Stanley was detailed internally in November in a lengthy document that outlined the wealth unit's 2014 compensation structure, some advisers realized it was happening only after it was implemented and their pay checks dropped in recent weeks according to several advisers.

The advisers who spoke with Reuters said many of the bank's roughly 16,426 financial advisers are now unhappy. They said the change could repel clients who use the bank to get access to new issues. Access to hot IPOs and new bond issues can also be make-or-break for building new client relationships and maintaining existing ones.

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The average retail broker at Morgan Stanley typically gets no more than a few hundred shares per client for popular IPOs that the firm underwrites, said one of the advisers, who requested anonymity because he did not want to be seen criticizing his own firm.

"I got 100 shares of Twitter for a guy when they went public, and I'm sure he won't be happy if he wants something else and I tell him it's not available," the adviser said. "It's not a good situation."

Morgan Stanley uses its retail brokerage in seeking to win stock and bond underwriting assignments, saying the size of its sales force gives it an advantage over Wall Street rivals. The bank was ranked No. 1 for equity underwriting fees in the first quarter, according to Thomson Reuters data.

At the same time, the bank is also trying to improve the profit margins in its wealth management unit, which now accounts for about 40 percent of the company's revenue, looking at both increasing assets under management and selling clients more products.

Morgan Stanley has been tweaking its incentive structure for advisers the past few years to align with its business goals. The 2014 compensation policy, for example, also included bonuses for making loans as well as incentives to brokers who could convince clients to tell Morgan Stanley what assets they hold outside the firm as that gives advisers the chance to pitch for them.

(Additional reporting by Jed Horowitz; editing by Paritosh Bansal and Martin Howell)

[© 2014 Thomson Reuters. All rights reserved.]

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