Morgan Stanley CEO James Gorman has a new target: Broker compensation.
At an investor conference last month, Gorman set a goal of reducing wealth management's comp-to-revenue ratio to 55% from the current level of just under 60%. To do this, Gorman suggested the firm could increase overall revenues, increase banking and lending revenues, for which advisors are paid a lower rate, and reduce recruiting expenses.
"I think that what Mr. Gorman said is what many CEOs are probably thinking," said Bill Willis, president and CEO of Willis Consulting, a recruiting firm. "Every business tries to control costs and in the retail brokerage business the biggest cost is the brokers."
The industry usually begins to review compensation plans as the third quarter kicks off. "Everyone is working on their comp right now," said a wirehouse executive. But observers say firms in the employee advisory channel walk a fine line this time of year. Tweaking compensation could backfire, hurting advisor retention rates and recruiting at a time when the industry is thriving, but also losing advisors who either aging out or leaving to go independent.
"Gorman is a bright man, a brilliant CEO, but his audience is more than just shareholders," says recruiter Danny Sarch, president of Leitner Sarch Consultants.
Changes in compensation and business models over the past decade have resulted in a shift towards more advisors generating revenues from fees rather than commissions. The number of fee-only advisors, who have at least 90% fee-based revenue, has doubled industry-wide since 2004, according to data compiled by Cerulli Associates. Meanwhile, the percentage of wirehouse advisors who generate at least half their revenues from fees has reached 84%, compared to 57% of advisors overall.
Last year, wirehouses reported only 2% of advisors as commission-only, which Cerulli defines as less than 10% in fee-based revenue.
Analyst Alois Pirker of Aite Group says there's strength in numbers when considering changes to compensation.
"You need to have a concerted effort across the chief competitors. If you're the only one who's doing it, your advisors will walk out the door," says Pirker. "What I could see happening is not blunt cutting but redirecting to certain growth incentives. If you're meeting certain goals, then you'll get these bonuses."
Spokespersons for Wells Fargo and Bank of America declined to comment on their compensation plans. UBS was unavailable for comment at the time of publication.
James Wiggins, a Morgan spokesperson, defended the firm's current comp plan and methodology for crafting compensation.
"We currently offer the richest growth award in the industry and promote partnership through a unique program that enables top FAs to obtain stock essentially at a discount. Our plan also rewards longevity and has incentives for broadening the client relationship through banking and lending. These concepts will continue to drive the comp plan in 2015 and beyond, which will always be highly competitive in the industry," Wiggins said in an emailed statement.
Morgan executives have slashed costs in other areas of the business. Non-compensation expenses for wealth management declined 6% for the first quarter of this year, falling to $762 million from $808 million for the year-ago period.
Executives have also sought cost efficiencies through different means, reducing the number of branch offices by about 25% and branch managers by about 18% since 2010, according to a firm spokesperson. And earlier this year the New York-based firm shook up the executive ranks, reducing the number of divisions to two from three and the number of regions to eight from 12, according to an internal memo. A Morgan spokesperson confirmed its contents.
Meanwhile profits from wealth management have also risen at Morgan. The bottom line grew 4% year-over-year for the first quarter of 2014, rising to $3.6 billion from $3.4 billion for the year-ago period.
However, the unit's comp expenses also rose for the first quarter, growing to $2.2 billion from $2.1 billion for the same period a year ago, a 5% increase.
Wealth management has become a major profit driver for many.
"Wealth management is a big driver for these banks. They're solid contributors to revenue at these firms. But when you compare the U.S. brokerage model to the European model, it's a lot more costly to run," says industry analyst Pirker.
Some analysts say that Gorman can achieve his goal of reducing the compensation-to-revenue ratio by promoting other revenue streams for which advisors are compensated less, such as loans.
"If you can increase the mix of or add additional revenues on the liability side you can bring your overall compensation or revenue ratio down without actually reducing the compensation plan," notes compensation consultant Andrew Tasnady, founder of Tasnady Associates.
In the meantime, advisors will be waiting to see if and where cuts may come.
"The devil's in the details and the Street is waiting to see what's there," says Sarch.
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