Morgan Stanley Slams Futures Advisors with Compensation Revamp
Morgan Stanley will credit advisors who operate as futures and commodities brokerage “specialists” with just 85% of the commodities commissions they generate as of October 1, a midstream change in the 2016 compensation plan as the firm economizes in a shrinking business, according to brokers briefed on the plan.
The move, announced in a conference call on Friday, follows a 25% production quota hike that took effect on July 1 that has halved the number of brokers who qualify as “futures transaction specialists,” one broker said. The designation allows brokers to receive futures and commodities trading referrals from Morgan Stanley’s network of 16,000 brokers as part of their broader wealth management businesses.
While the changes affect a minute group of wealth management advisors, they have raised concerns because of the abruptness with which they are being unrolled and because of the precedent they could set for firms to alter compensation terms that were to have been effective for a full 12 months, said some brokers and lawyers.
“We have no comment, except to point out that while the futures business is tiny, involving less than 200 financial advisors, we will continue to facilitate it for the benefit of those clients who do use the product,” Morgan Stanley Wealth Management spokesman Jim Wiggins said in an email.
The decision to “scrape” 15% of the futures and commodities commissions that brokers generate from their grid-compensable revenue could generate arbitration complaints, said brokers who spoke on condition of anonymity.
“It’s a fairly aggressive move,” said Tom Lewis, an attorney at Stevens & Lee who often represents brokers in compensation cases but who said he was unfamiliar with the Morgan Stanley move. “Morgan Stanley could be testing the waters to see if it they could apply this to bigger issues and get away with it, and other firms could follow.”
In explaining the planned commission haircuts on the July 22 conference call with the specialists, Morgan Stanley officials said they needed to redeploy revenue to expand the company’s international commodities business and to cover rising data-feed and related technology expenses charged by futures exchanges to commodities brokerage firms, according to one broker.
Many of the futures/commodities specialists are former Smith Barney advisors who received forgivable loans that term out in 2019 as retention bonuses when Morgan Stanley bought its rival, and are reluctant to jump before them, he said. As a sop, Morgan Stanley will credit them for grid purposes with the 15% that it is scraping through the end of 2017 if the “phantom” amount would vault them to a higher breakpoint.
The firm was less flexible on raising the production quota to $100,000 of annualized commodities commissions from $75,000. In announcing the plan on June 1, it gave brokers 30 days to hit the new floor. Those who failed had a choice of transferring their commodity books to another specialist in return for a 40% split or of receiving a one-time forgivable loan note payout, the broker said.
The specialists produced around $32 million of revenue for Morgan Stanley last year, equivalent to the average of a small to mid-size branch, he said.
Sean Maher, head of Morgan Stanley Wealth Management’s cross-asset structured product sales and of the futures transaction specialist teams, referred questions to the company spokesman.