Frenzied brokerage recruiting wars are over

NEW YORK (Reuters) - The free-for-all in the brokerage industry last year that sent thousands of advisers to new employers dangling juicy pay packages, has given way to a period of stability.

Consolidation among the largest U.S. brokerages, and the scramble among those firms to boost assets, fueled a golden era for many of the most productive financial advisers. Industry tracker Discovery Database said 8,667 brokers walked away from their jobs at Morgan Stanley Smith Barney, Merrill Lynch, Wells Fargo & Co and UBS Wealth Management last year.

Enticing recruiting bonuses forced firms to offer equally lucrative retention plans. Industry executives say 2010 should be a lot calmer.

“I truly believe that the industry is moving to a more rational recruiting model,” Morgan Stanley Chief Executive James Gorman told analysts on Wednesday.

“There is relatively low recruiting activity, probably the lowest that I’ve seen in my career of 10 years of overseeing these kinds of businesses,” said Gorman, who previously ran the brokerage businesses of Morgan Stanley and Merrill Lynch.

Morgan Stanley, which created a brokerage venture with Citigroup’s Smith Barney last May, suffered the heaviest defections in 2009. Its losses included about 700 Smith Barney advisers who left Citigroup in the months leading up to the merger, and 174 advisers who defected during the second half of the year, reducing its adviser force to 18,135.

This hurt Morgan Stanley’s results. On Wednesday it reported its third straight quarter of net withdrawals by clients, a total of $15.5 billion over that period.

Meanwhile, compensation for wealth managers stood at 63 percent of the revenue they generated, an “unattractive” ratio, said analyst Brad Hintz of Bernstein Research.

Gorman, who remains actively involved with a business generating half of Morgan Stanley’s overall profit, said broker movement has slowed to a crawl.

“We went through a frenetic period as an industry over the last couple of years,” he said. “I think for the next couple of years ... it should stay low and relatively stable.”

Veteran recruiter Michael King, of Michael King Associates, said movement will slow because so many brokers are now tied to their firms, either with retention plans or because they accepted recruiting packages with long-term commitments.

“The big wave was last year, from the end of ‘08 through the first half ‘09. A lot of the people who wanted to move, moved,” King said. “And many of the people who have not moved are already under contract.”

King noted that most of the top advisory firms continue to offer big pay packages.

The outlook for Morgan Stanley’s wealth business is brighter, analysts said.

Executives at the firm said turnover among the top 40 percent of advisers was under 1 percent during the fourth quarter.

Stability, and merger savings, will lead to a rebound in assets and revenue. Gorman expects some inflows in 2010 and up to $50 billion of net new client money next year.

Bank of America Corp executives spent little time discussing Merrill Lynch Global Wealth Management on Wednesday -- the business generated 12 percent of the big bank’s total revenue -- but the second-largest U.S. brokerage also reported some positive signs.

Merrill Lynch retained 94 percent of its top producers, while the overall number of advisers rose slightly to 15,006.

Last week, Bank of America’s Global Wealth and Investment Management president, Sallie Krawcheck, told reporters the pace of departure by top producers fell to a record low during the fourth quarter, to half the rate of the firm’s best previous year.

“Despite what I read about these big attrition rates, it’s not happening,” she said.

Reporting by Joseph A. Giannone; editing by John Wallace