Morgan Stanley recently unveiled comp plan changes to its more than 15,000 advisors, shortening the vesting period for deferred cash compensation and sweetening two awards that help further the firm's goal of growing its banking and lending business.
"For most of our clients, effective wealth management means making smart decisions about their assets as well as their liabilities," Greg Fleming, president of Morgan Stanley Wealth Management, told the firm's advisors in a memo.
Morgan is providing a bonus to incentivize advisors to grow their cash management business. For growth in clients who are "cash management engaged," advisors can earn between $5,000 and $50,000 while support staff can earn between $1,250 and $12,500, according to a source familiar with the matter.
The wirehouse defines a "cash management engaged" client as having an average daily cash balance of $50,000 or $5,000 per month in direct deposits; using two out of five payment mechanisms such as debit card, online bill pay, Morgan Stanley American Express Card; and maintaining that status for three consecutive months.
The minimum to qualify for the bonus is five new cash managed clients, either new or existing ones, and $125,000 in new cash balances.
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Fleming said in the memo that private banking services are a top strategic priority.
"Highly competitive lending solutions have proven popular with clients, and for 2016 we will focus on extending our suite of services to bring clients new convenience and value in their day-to-day cash management," he said.
These areas have proven to be very profitable. At the end of the third quarter, securities-based lending, residential and other loans rose 34% year-over-year to $46.5 billion. Assets in the wirehouse's bank deposit program rose 8% to $139 billion. Net interest income, part of which is derived from lending revenues, soared 20% to $777 million.
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Morgan Stanley is also enhancing a reward for growing the lending business. Under the 2016 plan, support staff can earn $10,000, up from $2,000 under the 2015 plan.
"They are taking a little bit of control and saying you can still bonus your staff, but we want a little bit of say in this," says Andy Tasnady, head of an eponymously-named compensation consulting firm.
It's also an approach that the other wirehouses have been pursuing. Brokers, however, can be divided on the practice, industry insiders say. It's not suited for every client, and some advisors have said they felt pressured to sell lending and other banking services.
Lending and banking services are also sticky in that they bind the client more closely to the firm, making it more difficult for advisors looking to transition to another firm, says recruiter Mark Elzweig.
"If the client has a lending relationship, and you are going to some way close that out and open a new one, there is extra work to do in order to check rates and make sure that is a feasible alternative," he says. "It does make it a little harder for an advisor to move, but not insurmountable."
FIXED INCOME SLUMP
Morgan's growing focus on wealth management and its banking and lending capabilities comes as other business areas have proven less profitable. Morgan Stanley is reportedly considering cutting up to 25% fixed-income staff after years of insufficient returns, according to Bloomberg.
Last month, the company reported a 42% plunge in bond-trading revenue in what CEO James Gorman called its worst quarter for fixed income, currencies and commodities since he took over in 2010.
While the financial industry may finally be reaching the end of a years-long slide in that business, it still isn't clear how much revenue it'll typically produce after stabilizing, Colm Kelleher, head of the investment banking and trading division, said at a Nov. 17 investor conference.
Wealth management is seen as a much more stable revenue generating business. In his memo, Morgan's Fleming told advisors that wealth management is the "core" of Morgan Stanley.
"My leadership team and I are intent on building – with all of you – the best wealth management business the industry has ever seen. We can only do this if our FAs are in the same boat with management, rowing in the same direction," he said.
Morgan Stanley made no changes to its grid payout or to its deferred compensation. Merrill Lynch, however, stretched its core grid ranges by $50,000 for producers under $1.5 million. Payout rates stayed the same at Merrill. In other words, a $500,000 producer may have to boost his or her revenue by 10% to earn the same payout next year.
- Read more about the changes: Merrill Raises the Bar on Broker Pay
The firm also shortened the vesting period for deferred cash to six years from eight years under its 2015 comp plan. The vesting period for compensation in the form of Morgan Stanley stock remains unchanged at four years.
"It's somewhat more in line with the industry, which is somewhere around 5 years [vesting] on deferred comp," Tasnady says.
Although the firms watch each other as they roll out new comp plans, there are few last minute big changes. Much of the planning has been done in advance, Tasnady says.
"It might get them to move slightly, be a little more aggressive or a little less aggressive. But in general, firms have already spent months figuring out what the calibrations are. They are just fine tuning," Tasnady says.
He suggests firms are better off announcing the news earlier.
"Advisors hate the unknown and always assume the worst," he says. "So if you don't have bad news, get it out early and let everyone have a happy holiday end of year season. And they'll be ready Jan. 1."
--With reports from Bloomberg.