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Morgan Stanley Wealth Management announced the 2013 compensation plan Thursday afternoon to its 17,000 brokers.
For the firm, it is a gamble that brokers will be willing to take a cut in a bonus, in exchange for potentially richer rewards for bringing in new business and acquiring shares in the firm at a cheaper price. For brokers, it's also a bet that the company's stock price will rise in the next few years, since a portion of the shares must be held for three years.
"That's a gift that's got strings. They're giving you a discount on stock and ownership in their company but saying, 'Don't leave us and if you do you lose it'," said Tony Riotto, founding partner of Riotto Jones, a recruiting firm for private bankers.
Morgan Stanley shares were down 1.4 percent, closing at $16.74, on Thursday. Its shares are up 11 percent this year.
Morgan Stanley chief executive James Gorman has pledged to investors that he will build out the wealth management business while also cutting $300 million in expenses from the unit. Wealth management makes up about 44 percent of the firm's ongoing revenue.
Nearly four years into its acquisition of the Smith Barney brokerage from Citigroup Inc.
To do that, the firm must cut back in other areas. The so-called revenue bonus, which goes to advisers who generate at least $750,000, will be cut by 2 percentage points next year, to a range of 0.5 percent to 4.5 percent. A broker bringing in just that amount will see his revenue bonus drop by $15,000. At 4.5 percent, a broker with $5 million in revenue will get $100,000 less.
A Morgan Stanley official said the cut was made to cover the costs of new bonuses that are tied to the amount of net new assets and new loans the advisers bring in. New assets would come from bringing in new clients or having existing clients increase the amount of funds they place with the firm.
The bonus to award net new assets also comes with the perks of a more flexible vesting schedule and a potentially higher payout than the revenue bonus, but advisers may not welcome it with open arms. That's because in 2013 that bonus will only go to the top 40 percent of performers among peers who've been at the firm about the same length of time. In the current program, advisers don't get scaled against their peers' performance.
"They may decide that 2 percent (revenue bonus) they're losing is not worth what they're getting in a stock that they have to hold for three years," Riotto said.
PRIMARY PAY UNCHANGED
Several advisers interviewed by Reuters after the plan was announced said that their bigger concern had been that profit pressures would lead to changes in the percentage they are paid for revenue they generate - the primary paycheck for a broker. That remains unchanged for 2013.
Greg Fleming, president of the wealth management business, has pledged to deliver a pretax profit margin of around 15 percent by the middle of next year, and eventually margins above 20 percent. Last quarter Morgan Stanley Wealth Management delivered a pretax margin of 13 percent, excluding one-time costs.
At an investor conference on Tuesday, Fleming was asked by an audience member how Morgan Stanley could achieve its profit goals given how much revenue goes to broker pay.
Fleming said it was tough to cut broker pay in a competitive hiring environment, but he was confident the company would hit its profit goals.
"The existing system for compensation also works for shareholders," he said.
The advisers' pay-out grid, industry parlance for the chart used by brokerage firms to determine basic pay, has been left unchanged. Advisers at Morgan Stanley receive a percentage of the revenue they generate, with the percentage amount increasing at certain levels.
Also unchanged was the minimum account size on which the company's advisers can get paid a fee. That was left at $100,000, well below the minimum size of $250,000 at rival Merrill Lynch Wealth Management.
Morgan Stanley rival UBS Wealth Management Americas released its 2013 compensation plan earlier this week, making tweaks to reward advisers for cross selling, but leaving the pay grid unchanged.