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 For now, executives are considering changes at the margins: cutting
pay for brokers who generate the least revenue for Morgan Stanley
Wealth Management, and slashing the money it sets aside to lure
experienced new hires. Executives have been hashing out
possibilities for the 2015 broker pay plan in recent weeks, but have
not made any final decisions.
"There are some functions you don't need to continue to put money
into as the revenue line grows, as we become bigger, as we are more
selective on recruiting and we have less attrition," Greg Fleming,
president of Morgan Stanley Wealth Management, said in an interview
last month.
Reducing pay in the brokerage business is tough to do, because even
mid-grade advisers are still in high demand and can easily leave for
other banks, or strike out on their own, often taking some prize
clients with them. Demand for talent is slacker in other businesses
like trading.
Many customers are fiercely loyal to their financial advisers. That
is particularly the case if they credit the advisers with helping to
make them wealthy.
Clients share personal information during marriages, divorces and
family emergencies, and advisers can become almost like personal
concierges to top clients - offering access to hot investments,
coming up with loans for medical procedures, or wining and dining
them at celebrity cocktail parties and sporting events.
Executives at Morgan Stanley are trying to ensure they incentivize
the brokers to do the right thing for customers and the firm. The
bank is hoping to reduce the commissions brokers get to simply buy
and sell securities, and to instead encourage them to offer more
holistic financial advice.
Gorman said at a conference last month that he wants to pay 55
percent or less of wealth management revenue to brokers, 5
percentage points down from the current 60 percent. Fleming is
responsible for hitting that target.
Reducing what is known as the "compensation ratio" by that much
would save the firm $884 million in costs next year, based on a
revenue projection from Bernstein Research – big savings for a bank
with $28 billion in total annual costs.
Fleming told Reuters he can get there not by cutting pay, but by
growing revenue through products like loans, and by being more
careful not to spend too much on bonuses for new advisers.
Recruiting has become a substantial expense for big brokerages like
Morgan Stanley in recent years, with multi-million-dollar sign-on
bonuses routinely offered for advisers with large books of business.
The bonuses can be so large that they make an adviser an
unprofitable bet, even when spreading the cost over the years he or
she spends generating revenue.
"The recruiting costs are tremendous to bring experienced advisers
over," said Robert Dicks, who heads Deloitte Consulting's Human
Capital Financial Services practice in the U.S. "Lowering that and
having more success in developing new advisers into the business is
key to bringing down the compensation ratio."
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In the longer run, some Morgan Stanley executives wonder if the bank
will have to cut compensation expenses for its 16,426 advisers even
more.
Although Gorman's wealth management target was the most aggressive
cut to pay ratios in Morgan Stanley's three business units, the 55
percent ratio is still much higher than the 40 percent or less he
outlined for institutional securities and investment management.
"Bank executives say, it's a high-cost, high-aggravation business
and why can't we bring it under control?" said Alan Johnson, a Wall
Street pay consultant, referring to the challenge of managing the
personalities and pay packages of thousands of individual advisers.
"They think about it every day - even just getting another 1 percent
on billions of dollars' of revenue is a lot of money."
Privately, at least one Morgan Stanley executive said he believes
the compensation ratio in wealth management should eventually fall
far below the one Gorman outlined, although he acknowledged such a
goal would be difficult to achieve unless the industry moved in
lockstep to reduce pay all at once.
Plenty of industry veterans are skeptical banks will be able to cut
broker pay at all, given the competitive hiring environment, and how
important the business has become for earnings. Wealth management
now produces more than 40 percent of Morgan Stanley's annual
revenue, and about 60 percent of its pretax profit.
"It's not just tough, but impossible," said Mindy Diamond, a
brokerage recruiter who runs Diamond Consultants in Chester, New
Jersey. "I can tell you unequivocally that if they do anything to
meaningfully mess with comp, they would lose a good majority of
advisers. I just don’t see it happening."
(Reporting by Lauren Tara LaCapra; Editing by Martin Howell)
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