EXCLUSIVE: Morgan Stanley to Change Payout Calculation
(Recasts last paragraph to indicate firm will fine brokers for failing to report arrest and bankruptcy/lien histories.)
In a compensation twist that could prompt its brokers to rely even more heavily on fee-based advisory accounts that smooth revenue production, Morgan Stanley will recalculate payout levels in 2018 on a monthly basis rather than using its twice-a-year current model.
The unusual ‘rolling grid’ plan that is expected to be announced to the firm’s 15,700 brokers next week will tie the monthly percentage of fees and commissions that they keep to their total production over the previous 12 months. Most brokerage firms calculate payout percentages for an entire year based on the previous year’s revenue that a broker produces, although Morgan Stanley this year introduced a six-month lookback.
“It’s smoother than the old system,” a Morgan Stanley spokesperson said. “It’s always capturing a 12-month period, so one month’s change has less impact.”
The firm, which is more reliant on its wealth management business than its major banking competitors, also believes that the monthly calculation will curb broker temptations to engage in high-pressure or high-commission practices toward yearend to reach a higher payout rate for the coming year. The Department of Labor’s fiduciary rule that became partially effective in June aims to curtail such behavior.
“This is addressing changes in the regulatory environment, the DOL among other things,” the spokesperson said.
Though the change risks riling brokers with a fundamental change that other firms have not introduced, Morgan Stanley assured managers who got a preview of the 2018 compensation plan earlier this week that it will not fiddle with the fundamental grid threshold levels that determine payouts.
The firm’s 16 grid hurdles that determine payouts of 28% to 55.5% of the money generated from customers will not change next year, they were told. The hurdles are tied to revenue and length of service, and brokers also will continue to receive bonuses for selling loans, deposits and hitting growth goals.
How brokers react to the calculation change depends on whether they are on the rise or on the wane in their career production tracks, said Andy Tasnady, a brokerage industry compensation consultant. The monthly calculation also creates an incentive for brokers to use more fee-based advisory accounts that generate revenue regardless of client activity rather than commission-based transaction accounts, he and some managers said.
“If you just look at flat revenue produced, the monthly calculation shouldn’t make a difference,” Tasnady said. “A 12-month (annual) calculation is easier to model, but a rolling 12-month one should keep production and payout rates very stable.”
Some brokers and managers said brokers will think twice about taking long vacations since an absence from the firm can affect their monthly cash flow under the new system.
“Advisors always want to start at a high grid and not have pressure each month,” said a branch management source who was briefed on the changes earlier this week. “This will make them feel more pressure to perform.”
The new calculation calendar also could further Morgan Stanley’s goal of getting brokers to work on teams, since they will have more cover from colleagues if they take time off, Tasnady said.
In other changes, the 2018 Morgan Stanley plan makes behavioral tweaks aimed at reinforcing disclosure rules and curbing what may be viewed as self-dealing.
Starting in January, the firm will no longer pay brokers for opening retirement accounts for themselves or their families, a policy that Wells Fargo Advisors included in its 2017 compensation plan and that UBS is adopting in 2018, a spokesperson confirmed. Unlike Wells, Morgan Stanley will continue to give brokers production credit for assets added to such personal plans.
Morgan Stanley also is cracking down on brokers who expose it to regulatory sanctions by failing to report arrest records and financial judgments such as bankruptcies and liens.
Starting in 2018, brokers will be penalized up to $1,000 for failing to report violations, the spokesperson said.