The history of the wealth management industry is full of boom and busts. With every bull market, the industry seems to hire too many people, only to lay off staff during the subsequent bear market. This bull market, which began in March 2009, does not follow this same pattern. The industry seems to be in perpetual cost-cutting mode, even while the markets have soared, because the financial crisis fathered numerous giant mergers where many positions and locations are duplicated.
The biggest merger in the industry’s history occured when Morgan Stanley purchased 51% of Smith Barney from Citicorp in 2009 and closed the acquisition in 2013. The original press release, issued in January 2009, said the merger would generate cost savings totaling $1.1 billion by “consolidating key functions including technology, operations, sales support, product development and marketing. These operational efficiencies represent approximately 15% of the combined firm’s estimated expense base, excluding financial advisors’ commission compensation.”
Though Morgan Stanley is still closing branches tactically as leases in duplicative markets expire, home office layoffs have slowed considerably. Over the last two years, it has become clear that further savings, as the 2009 press release foreshadowed, would be coming from the compensation of the financial advisors.
Morgan Stanley CEO James Gorman said in January his goal was to get the company’s ROE to 10%, up from 8.9% in 2014. Wealth management, which was responsible for 49% of the firm’s revenue, posted a margin of 20% for 2014 and was expected by Gorman to hit 25% margins by the end of 2015. Gorman specifically noted Morgan Stanley paid out 60% of wealth management revenue as compensation and expected that number to drop to 55% in 2015.
To support that goal, last December, Morgan Stanley released its “Financial Advisor/Private Wealth Advisor Compensation Plan, Growth Award and Recognition Programs 2015.” The 30-page document is complicated enough to need an accompanying 30-page FAQ. Ironically, in the first section of the FAQs, the first of the “primary goals” listed for the 2015 Compensation Plan is “simplify the compensation structure.” As one Morgan Stanley advisor told me: “The first three pages are how they pay you; all the rest are about how they take it away.”
Even though the basic payout grid is relatively simple, the exceptions and the policies behind them take pages and pages to explain and illustrate. As Gorman noted, the true primary goal, is to save money for the firm.
The introduction to the compensation plan document says, “The Morgan Stanley Wealth Management Financial Advisor/Private Wealth Advisor Compensation Plan provides FA/PWAs with a guaranteed salary as well as an opportunity to generate significant additional income through Incentive Compensation and the Growth Award.” Well, the guaranteed monthly salary runs from $2,000 to $3,000 per month, depending upon the state. Hardly brag worthy. And yes, the next 30 pages or so detail the bonuses which can be substantive but are less than what has been paid in the past.
Careful examination of the document and its predecessors over a few years shows the overriding trend within Morgan Stanley, and duplicated in many ways by its wirehouse competitors, is to gradually chip away at the wealth management industry’s biggest cost: financial advisor compensation.
The following points demonstrate how firms are altering advisors’ compensation plans:
Advisors are paying an ever bigger portion of the compensation of their sales assistants.
All firms create a ratio which determines the number of sales assistants that a given branch should have in support of the advisors. A few years ago, it was about $1 million in production per sales assistant. So, a sales assistant could support two $500,000 producers or one $1 million producer. Traditionally, advisors would bonus their staff out of their own pockets. Now, that ratio is closer to $1.5 million per sales assistant. The $1 million advisor with his own assistant is therefore paying for a third of the compensation of his assistant. Has that advisor’s compensation been cut? No, but more dollars are coming out of his pocket.
Firms are carving out more exceptions to the printed grid payout and are paying less than grid for more explicit types of production.
Morgan Stanley doesn’t pay their advisors for production and fees generated from their own money. They do get a substantive employee discount, but the gross production generated doesn’t hit the production grid and result in W-2 income.
Wirehouses are paying increasingly less for smaller households. For Morgan Stanley, advisors get a reduced payout for households with under $100,000 in assets held at the firm [there are many exceptions to the small household policy].
Morgan Stanley is also paying less on small trades, regardless of account size, less on equity syndicate and less on non-resident client business.
More advisor compensation is being deferred.
For the first time in many years, Morgan Stanley changed the actual payout grid in 2014; they raised the brackets by 10% so an advisor had to do 10% more production to get the same percentage he or she received in 2013. For 2015, they created a matrix structure where for the first time a combination of length of service and production level determines an advisor’s payout. In the past, length of service, or LOS, was given as a distinct bonus. As recently as 2008, it was paid in cash in February of the subsequent year. In 2013 and 2014, it was vested 25% in year four and 75% in year eight.
In 2015, Morgan Stanley has a separate grid, based on production, which takes up to 15.5% of an advisor’s net and defers it the same way as they did the legacy LOS bonus. The compensation plan document says, “Deferred compensation awards are contingent upon the FA/PWA remaining employed through the grant and vesting dates of the award.”
They defer more of the income because they expect they will not have to actually pay a lot of it [remember they want to save money!]. The advisor’s earnings are held hostage to either keep the advisor in place or to not have to pay it at all since some advisors will inevitably leave.
If you stay, your firm has all of the power.
Industry attorney Thomas B. Lewis told me advisors remain at-will employees and may have no recourse when a firm changes its compensation structure: “Unless the compensation is retirement money protected by ERISA, a plan document, or a contract, a firm is within its rights to change its pay policies.” Even though you might not collect this money until you are quite old and gray, Morgan Stanley makes it clear that deferred compensation is not under the protection of ERISA laws: “Deferred compensation awards are not intended to provide for retirement income.”
Have a problem or a dispute? Want to use this current structure to make your own personal financial plan?
“Morgan Stanley Wealth Management retains the full discretion and authority to interpret, modify and/or terminate the compensation plan, or any of the individual guidelines described in the compensation plan, at any time, with or without notice, and to resolve any dispute arising out of or in any way related to the compensation plan,” the compensation document says. “Morgan Stanley Wealth Management’s interpretations and decisions shall be final and binding on all parties.”
I credit Gorman for making his intentions clear in his public statements. It’ll be interesting to see how advisors respond after their first few paychecks.
Danny Sarch is an On Wall Street contributing writer and president of Leitner Sarch Consultants in White Plains, N.Y.
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