By Lauren Tara LaCapra and Jennifer Hoyt Cummings
Dec 6 Morgan Stanley's wealth division,
in a change to how it rewards its increasingly important
brokerage force, is cutting bonuses tied to the revenue that
advisers generate, but also offering discounted stock and new
incentives to brokers if they bring in new assets and get their
clients to borrow money.
Morgan Stanley Wealth Management announced the 2013
compensation plan Thursday afternoon to its 17,000 brokers.
For the firm, it is a gamble that brokers will be willing to
take a cut in a bonus, in exchange for potentially richer
rewards for bringing in new business and acquiring shares in the
firm at a cheaper price. For brokers, it's also a bet that the
company's stock price will rise in the next few years, since a
portion of the shares must be held for three years.
"That's a gift that's got strings. They're giving you a
discount on stock and ownership in their company but saying,
'Don't leave us and if you do you lose it'," said Tony Riotto,
founding partner of Riotto Jones, a recruiting firm for private
Morgan Stanley shares were down 1.4 percent, closing at
$16.74, on Thursday. Its shares are up 11 percent this year.
Morgan Stanley chief executive James Gorman has pledged to
investors that he will build out the wealth management business
while also cutting $300 million in expenses from the unit.
Wealth management makes up about 44 percent of the firm's
Nearly four years into its acquisition of the Smith Barney
brokerage from Citigroup Inc., Morgan Stanley is focusing
on profit growth, and the new pay plan is meant to align
brokers' pay to these goals, including growing its loan book.
To do that, the firm must cut back in other areas. The
so-called revenue bonus, which goes to advisers who generate at
least $750,000, will be cut by 2 percentage points next year, to
a range of 0.5 percent to 4.5 percent. A broker bringing in just
that amount will see his revenue bonus drop by $15,000. At 4.5
percent, a broker with $5 million in revenue will get $100,000
A Morgan Stanley official said the cut was made to cover the
costs of new bonuses that are tied to the amount of net new
assets and new loans the advisers bring in. New assets would
come from bringing in new clients or having existing clients
increase the amount of funds they place with the firm.
The bonus to award net new assets also comes with the perks
of a more flexible vesting schedule and a potentially higher
payout than the revenue bonus, but advisers may not welcome it
with open arms. That's because in 2013 that bonus will only go
to the top 40 percent of performers among peers who've been at
the firm about the same length of time. In the current program,
advisers don't get scaled against their peers' performance.
"They may decide that 2 percent (revenue bonus) they're
losing is not worth what they're getting in a stock that they
have to hold for three years," Riotto said.
PRIMARY PAY UNCHANGED
Several advisers interviewed by Reuters after the plan was
announced said that their bigger concern had been that profit
pressures would lead to changes in the percentage they are paid
for revenue they generate - the primary paycheck for a broker.
That remains unchanged for 2013.
Greg Fleming, president of the wealth management business,
has pledged to deliver a pretax profit margin of around 15
percent by the middle of next year, and eventually margins above
20 percent. Last quarter Morgan Stanley Wealth Management
delivered a pretax margin of 13 percent, excluding one-time
At an investor conference on Tuesday, Fleming was asked by
an audience member how Morgan Stanley could achieve its profit
goals given how much revenue goes to broker pay.
Fleming said it was tough to cut broker pay in a competitive
hiring environment, but he was confident the company would hit
its profit goals.
"The existing system for compensation also works for
shareholders," he said.
The advisers' pay-out grid, industry parlance for the chart
used by brokerage firms to determine basic pay, has been left
unchanged. Advisers at Morgan Stanley receive a percentage of
the revenue they generate, with the percentage amount increasing
at certain levels.
Also unchanged was the minimum account size on which the
company's advisers can get paid a fee. That was left at
$100,000, well below the minimum size of $250,000 at rival
Merrill Lynch Wealth Management.
Morgan Stanley rival UBS Wealth Management Americas released
its 2013 compensation plan earlier this week, making tweaks to
reward advisers for cross selling, but leaving the pay grid