Another Domino Falls as Morgan Stanley Curtails Recruiting
Morgan Stanley told its managers Tuesday that it will “significantly reduce” its recruiting of experienced advisers, a move that follows the leads of rivals Merrill Lynch and UBS AG’s U.S. brokerage network.
Brokerage firm executives have for decades complained that they were spending heavily to buy books of business by hiring experienced brokers from each other in an essentially zero-sum game, without reaping the rewards because as new brokers lose the incentive to produce or retire. Until UBS last summer said it would cut its recruiting budget by 40%, however, every firm was afraid to be the first mover.
In a memo to regional directors and branch managers reviewed by k-tcc, Morgan Stanley Wealth Management coheads Shelley O’Connor and Andy Saperstein said they will redeploy capital to hire sales and “digital advisor” associates to help the firm’s force of close to 16,000 experienced brokers build their practices.
“In particular, we’re focused on building our digital capabilities, making our branch operations more efficient, and giving advisors the ability to continue to build strong teams and successful practices,” they wrote. “Many of the resulting initiatives are beginning to roll out and there is much more to come, including hiring hundreds of additional Wealth Advisor Associates and Digital Advisor Associates in the branches to help Advisors put these new capabilities to work for their clients.”
Morgan Stanley’s decision was reported earlier Tuesday by The Wall Street Journal.
The firm will honor recruiting agreements that are fully approved and “in our pipeline” by June 16th and have a start date no later than September 1st, the executives wrote, but will otherwise “significantly reduce experienced advisor recruiting.” Merrill Lynch earlier this month similarly said it will pull the curtains on expensive recruiting deals as of June 1 but honor agreements in its “pipeline.”
The decision of the big firms, known as wirehouses, has broad implications for the way a new generation of brokers and managers practice and are paid. Branch and regional managers, for example, have long been incentivized to build branch customer assets through aggressive recruiting while brokers get a percentage of the commissions and fees they generate, with the number rising on a sliding scale with their total production. Merrill Lynch said it is has begun an experiment in smaller markets that pays new brokers primarily in salary for their initial careers, with supplemental bonuses for meeting performance criteria.
“We will develop new recruiting policies consistent with our objectives in the coming weeks,” O’Connor and Saperstein wrote in Tuesday’s memo.
While wirehouses in the past few years have slowed their civil wars, the signing bonuses on their books are enormous and have come under criticism by their bank parents. The bonuses are given in the form of high-six and seven-figure “forgivable” loans that brokers agree to pay back if they leave early through signed promissory notes,
Morgan Stanley had $4.72 billion of such loans on its books at the end of 2016.
“It’s too cost-ineffective,” said Jeffrey Crystal, a longtime Morgan Stanley branch manager in New Jersey who left the company earlier this month. “The margins on recruits are much less than from people who are already onboard.”
The net new number of wirehouse brokers and client assets gained in the past decade has dwindled to a trickle, several observers said, making Morgan Stanley’s decision more understandable.
“The accountants have figured out that the writing down of forgivable promissory notes is unsustainable,” said a West Coast-based retail brokerage recruiter who spoke on condition of anonymity.
Although the recruiting industry is likely to be a direct victim of the new hiring policies, the broker insisted that regional and independent broker-dealers such as Raymond James, Ameriprise Financial and Stifel Financial that have been unwilling or unable to match the recruiting deals of the wirehouses will now “become more aggressive” or at least hold their ground.
“This is a unique opportunity for regionals to gain significant market share,” he said.
Alois Pirker, research director at consultant Aite Group agreed, but said smaller firms can fall into the same trap as their larger competitors. “The issue of sustainability is the same as at the big firms,” he said. “It’s not where you want to be.”