EXCLUSIVE: Morgan Stanley to Raise Payout Grid Hurdles for 2017
(Updates to include comments from consultant in the fourth and fifth paragraphs.)
Morgan Stanley plans to raise by 10% the revenue that brokers must produce in 2017 to qualify for higher payout percentages, according to several well-placed sources who were briefed on the not-yet released compensation plan.
The so-called grid that determines the payouts will continue to have 16 breakpoints with percentages ranging from 28% of fees and commissions at the low end to a peak of 55.5%, they said.
While the changes will affect only those brokers hovering near grid breakpoints, the efficiencies for Morgan Stanley can be substantial. The largest U.S. broker-dealer, as measured by its almost 16,000 brokers, spent 57% of its $15.1 billion of wealth management revenue on compensation in 2015. It aims to reduce that comp ratio to below 56% in 2017, according to a presentation from Chairman and Chief Executive James Gorman in January.
The last time Morgan Stanley moved the goalposts was in 2014 when it raised breakpoints by 10% for those producing under $2.5 million, according to Andy Tasnady, head of compensation consulting firm Tasnady & Associates.
“There’s no upside for the FA,” Tasnady said. “At best you can stay even or you’re losing.”
Brokers seeking to jump from the lowest payout level of 28% to the next level of 32% will have to produce $242,000 in 2017, up from $220,000 currently. They similarly will have to generate $3.3 million, rather than $3 million, to qualify for the second-highest payout levels of 49-53%.
The firm’s revenue target of $5 million to qualify for the highest grid level will remain unchanged, with payouts ranging from 51.5% to 55.5% depending on length of service with Morgan Stanley.
The company also will not change the so-called penalty box, which pays a flat 25% of revenue produced to brokers with nine years of experience or more who produce less than $300,000 a year.
Details of the grid stretch and other compensation policies for 2017 are expected to be disclosed to Morgan Stanley’s brokerage force on Monday. UBS told its almost 7,000 brokers in the Americas in June that it will not change the 13 breakpoint hurdles on its grid next year but is raising payout percentages for brokers producing $1 million or higher.
Morgan Stanley, which did not change its grid in 2016, will continue to incentivize brokers to sell banking products to customers in 2017. The new comp plan will retain and expand bonuses for increasing sales of securities-based loans and mortgages and for growing the number of Premier Cash Management clients who use a combination of traditional banking services such as direct deposit, electronic bill pay, checking accounts and credit cards.
In an attempt to offset more volatile revenue from the company’s trading and investment banking divisions, Gorman has emphasized increased sales of interest-producing banking products within wealth management. The percentage of Morgan Stanley’s wealth management clients with loans from the firm grew to 15% at the end of the third quarter of 2015 from 9% at the end of 2013, according to Gorman’s presentation earlier this year.
The push comes in spite of charges from Massachusetts that Morgan Stanley has used illegal sales contests to generate portfolio-backed line of credit sales, a charge the firm has denied.
This is is the second time in 3 years that Morgan Stanley has raised grid thresholds by 10%. The firm will spin it as a motivator for FAs, but history has demonstrated quite the opposite. Median FA production is flat to down since the last grid threshold increase in 2014. With continued industry-wide fee compression, FAs have to grow their AUM significantly just to maintain current production levels, much less keep up with run-away grid thresholds.
The McKinsey team working on the 2017 comp plan expect it to add an additional 1.1% to the firm’s already high 23% pre-tax margins. Word around the firm is that Gorman is slated to get an obscene bonus if he hits 25% pre-tax margins. Expect him to continue his myopic hell-or-high-water march toward that goal with complete disregard for the long-term competitiveness and viability of the firm and its employees.
One would think that with competition getting stiffer from robo advisory firms, discount brokers, fund companies and others (i.e., Fisher hates annuities) chipping away at the FA’s lunch on every level that these large wire houses would offer more latitude to the FA, instead they raise the bar, full throttle for higher production to maintain the same payout level!!.
What’s amazing is the firm’s incessant attack on advisors doing $1 million in production. In 2014 they raised that grid threshold from $1 million to $1.1 Now they are raising it again to $1.2 million. The kicker is that there is a 3% payout change at that grid threshold. Meanwhile, UBS payouts are 3% to 5% higher at these levels.
You’d think that the firm would like to attract and retain advisors doing $1.1 million in production, but instead they are handing out pay cuts of $33,000+ per year. That’s real money, not something a family can just brush off and deal with.
Here’s some more data from the McKinsey consultants’ plan analysis:
Percent of FAs to get a payout reduction in 2017: 46%
Average pay reduction for affected FAs $13,000
Estimated increase in profit to the firm (at the expense of FAs): $90 million
People could go independent and get upwards of 93% of fees and commissions, pre-expenses of course, which are much lower than those that wire house people pay 6x over for like shared assistants with no time to do your work. Not sure what the heck they are all waiting for, except maybe a brick in the head with a note attached that says: “: We don’t want you!” “But we’ll keep managing your way out of the business.”
Here’s my favorite Gorman Quote from American Banker a few years ago while his pay climbs dramatically:
JAMES GORMAN
“You’re naive, read the newspaper, No. 1.No. 2, if you put your compensation in a one-year context to define your overall level of happiness, you have a problem much bigger than the job. And No. 3, if you’re really unhappy, just leave. I mean, life’s too short.”
Morgan Stanley’s CEO, expressing a lack of patience for any employees who might want to complain about the company’s recent dramatic pay cuts
What a jerk.
I’d have a principle issue continuing to work for a guy or company like that.
At least you do not work at Merrill lynch
Close
McKinsey has done the math I’m sure. Thin out the broker force by 15% or so with these new grid hurdles, and will probably retain 50-60% of those assets.
– The Financial Advisor Compensation plan has as its sole purpose to drive the most profit to the bottom line of the firm. It should be called the employee and customer manipulation plan. The Wire house Comp plan is incompatible with the Fiduciary Standard. This terrifies Wall Street’s executives.
– Some of the specifics will come in to play with the Grid, an integral part of every current “suitability standard” shops comp plan. Industry insiders know the grid has perverse incentives to push high commission products to cross over the grid points and increase compensation. Simply put the grid states you make this much revenue for the company by this deadline and you get x, but do this much more revenue by the same deadline and you get x + more pay = conflict of interest. Bingo!
– In practicality industry insiders know this plays out like this: October comes each year and Financial Advisors and management fret over the revenue grid lines in the comp plan yearend deadline. The industry has made a magnificent transition to fee base and that has smoothed earnings but at a cost. Fee based Financial Advisors get complacent and the only way to motivate complacent, well to do Advisors is with the comp plans grid line take always. The trouble is with a full on Fiduciary Standard the unhappy clients will win every time in arbitration when they complain that they bought an investment that paid a lot more to the company, paid even more to the Financial Advisor by enabling the advisor to cross a gridline and cost them a lot more in expenses than the best possible solution available to that same client.
Are these retroactive payouts? Or does the higher percentage apply only to commission above the trigger?
HaHaHaHaHa, another example of the big wire houses comp plan that is not focused on the client. Its not hard, figure out what clients want, put together programs that reflect what clients want/need, and then advertise /market what makes your firm unique!
It is premature to advise MS advisors to start packing up and looking for a new home, at least until Merrill and Wells announce what they are going to do. However, the independent channel is looking increasingly attractive for many and perhaps rightfully so.
It’s like an abused spouse..”No..they really do love me..”
Anyone knows what transactional payout is at MS for middle market or institutional brokering/trades? In other words if i have institutions involved in buying and selling bonds and other fixed income is the payout the same if i had mr. smith buying a mutual fund? At JPM it was a flat 35% before the lowered it.