Morgan Stanley Winnows Recruiting Loan Balances to Below $3 Billion

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Morgan Stanley Wealth Management’s pared-down hiring efforts over the past two years succeeded in cutting recruiting loans on its balance sheet by 29%, according to its 2019 annual report filed on Thursday.

The wirehouse pulled out of the Protocol for Broker Recruiting at the end of 2017 to protect its ranks by making it more difficult for brokers to leave at a time when it was retrenching from expensive recruiting of veteran advisors.

Morgan Stanley Chief Executive and Chairman James Gorman has long chafed at  the expensive “prisoners exchange” game that wirehouses long played of paying to lure advisors from each other, only to see many leave when their promissory notes matured. He also exacerbated the balance-sheet burden with retention loan deals paid to Smith Barney brokers, but they fully matured last year, according to the annual report.

Morgan Stanley’s report mirrored that  of UBS Wealth Management USA, which whittled its recruiting loan balances by nearly $1 billion to $2.05 billion at the end of last year from $3.03 billion at the end of 2016. UBS also in 2017 withdrew from the Broker Protocol, the industry recruiting pact that allows brokers to contact their former clients without fear of getting sued.

Both firms have re-entered the recruiting fray in recent months, a sign perhaps of their satisfaction in whittling down the overhang and rejiggering compensation plans to reward longevity.

“Morgan Stanley is signaling in a big way that they’re back in the recruiting market,” said Louis Diamond, a New York-based recruiter who works with the wirehouse. “It’s not as feverish as it was in the past…but they are definitely back in the game.”

Morgan Stanley last month elevated Ben Firestein, a veteran complex manager in New York to a newly created role as national recruiting head and has hired several teams from competitors this year.

UBS last week hired a $1.9-million producer in San Francisco from Morgan Stanley, and in January boasted in an internal memo to its field that it had recruited ten teams since November 2019 with a combined $29.6 million in production.

Both banks are seeking to fill branch desks that emptied during their recruiting hiatuses.

Morgan Stanley ended 2019 with 15,468 brokers, down 1.5% from 15,712 at the end of 2017. UBS at the end of last year had just over 6,000 U.S. advisors, according to internal tallies from brokers in the U.S., down by more than 1,000 from the end of 2016.

In its annual report, Morgan Stanley acknowledged that its falling loan balances have been “partially offset by new note issuances.”

The forgivable loans peaked in 2010, the year after Morgan Stanley bought Smith Barney, at $5.8 billion.

Competing wirehouses Merrill Lynch and Wells Fargo Advisors, owned by Bank of America and Wells Fargo & Co., do not break out forgivable loan balances in their regulatory reports.

While the wirehouses have been in a general recruiting retreat, some regional and independent brokerage firms have stepped up their efforts to recruit advisors with clients who are generally wealthier than their traditional customer base.

Forgivable loans at Ameriprise Financial at the end of 2019 were up 15.6% from a year earlier to $645 million, according to its annual report filed earlier this week.

LPL Financial, the largest independent broker-dealer with 16,500 brokers, reported a 45% jump in the loans to $338 million as of December 31.