Morgan Stanley, the brokerage with the biggest corps of financial advisers, changed its wealth-management compensation plan to encourage brokers to increase revenue and allow them to buy discounted stock.
The 2013 program pays a bonus of 2 to 5 percentage points of revenue for advisers who bring in new assets and are in the top 40 percent in revenue growth, according to terms outlined in a summary obtained yesterday by Bloomberg News. That comes at the expense of a 2 percentage-point reduction in the revenue bonus paid to all brokers who generate at least $750,000.
Greg Fleming, president of Morgan Stanley’s wealth-management business, is seeking to control costs while avoiding defections and meet his target of a mid-teens pretax margin next year. Wealth-management employees typically have been paid a higher portion of revenue than colleagues in trading units because the brokerage business takes less risk and demands lower levels of capital.
“There remains a lot of pressure from a recruiting standpoint,” Fleming, 49, said at a Dec. 4 investor conference in response to a question about possible changes to pay structure. “The existing system for compensation also works for shareholders.”
The changes don’t affect the so-called grid payout, usually the largest portion of a broker’s compensation, or the bonus based on tenure.
The growth bonus, in addition to the revenue percentage award, includes as much as $285,000 for bringing in more money from customers and making additional loans to clients, according to the document. The bonus, which the firm described as “richest on the Street,” is paid upfront in 2014 and structured as a five-year forgivable loan.
Brokers can invest as much as $250,000 of their compensation in Morgan Stanley stock and will get as much as a 25 percent bonus on shares they purchase, according to the plan. The bonus shares vest in April 2016, when the purchased shares are distributed.
Fleming said this week that his unit can reach profitability targets solely through cost cuts, meaning revenue improvements may provide a further boost. Integration expenses will end this quarter, allowing the pretax profit margin to increase next year, Fleming said. The margin was 13 percent in the third quarter, excluding one-time charges.
Morgan Stanley now owns 65 percent of the brokerage after paying Citigroup Inc. $1.89 billion for an additional 14 percent stake in September following a two-month fight over the value of the venture. The two banks agreed on a valuation for the purchase of the remaining 35 percent stake, which Morgan Stanley must acquire by June 2015. The firm will probably ask the Federal Reserve for approval to purchase the rest next year, a person briefed on the bank’s thinking said in October.
The brokerage is seeking to boost revenue through more lending and moving additional client assets into managed accounts, Fleming said. The average annualized revenue per adviser in the third quarter was $790,000. About 1,900 of the firm’s 16,829 brokers produce more than $1 million in annual revenue, he said.
Morgan Stanley tweaked the pay structure last year as well. The firm raised the minimum amount of revenue a broker must generate to avoid pay cuts to $300,000 from $250,000. It also reduced bonuses based on revenue production by 1 percentage point across the board, while introducing new bonuses for bringing in assets and making loans to customers, a person briefed on the plan said at the time.
Employees across Wall Street are facing pay cuts or losing their jobs as revenue growth wanes and shareholders demand higher returns. JPMorgan Chase & Co.’s bonus pool for its corporate and investment bank may shrink as much as 2 percent this year as the firm completes performance reviews, three executives with direct knowledge of the process said yesterday.