2019 Comp: Morgan Stanley Adds Account-Level Bonuses, Leaves Grid Unchanged
(Updated Monday afternoon with additional details.)
Morgan Stanley fired the starter’s gun on 2019 compensation plans on Monday, telling its almost 16,000 brokers that it is radically adjusting the way it calculates payouts and bonuses to award use of technology it believes will glue customers to its investment and lending products.
In a memo reviewed by “AdvisorHub,” field management head Vince Lumia told brokers that as of April 1, 2019, they will be able to increase their payout rates on a per-household-account basis by up to three percentage points. Grid payouts currently range from 28% to 55.5%, with payouts rising as revenue increases.
Morgan Stanley’s current revenue breakpoints and payout rates will not change, the memo emphasized, but the payout will rise by 100 basis points next year for each household account with a financial plan. Brokers can earn another percentage point for any customer that adds at least $500,000 of net acquired assets, or when assets under management from the household grow by 5% from 12 months earlier, said people familiar with the plan. (The final 1% payout incentive comes if a broker extracts $2 million of net new assets from the customer.)
“We are intentionally releasing the details of the plan earlier than we ever have in the past because we want to give you enough time to make changes to your practices so you and your clients are able to achieve the maximum benefit,” Lumia wrote, tacitly acknowledging some brokers’ resistance to adopting technology or promoting financial plans. The firm has introduced technology ranging from easily adopted e-signature programs to more esoteric risk-assessment analysis tools aimed at helping brokers attract new assets.
The most radical aspect of Morgan Stanley’s plan is tying pay changes and bonuses to individual customer accounts rather than to overall production that can be generated from a small percentage of a broker’s book, said insiders and consultants. It’s also the riskiest in terms of winning broker acceptance, because he or she needs widespread adoption across clients to make a meaningful difference to compensation.
“You’re going to need to fundamentally shift your business approach for this to add up,” said Andy Tasnady a retail brokerage firm compensation consultant who did not work with Morgan Stanley on the plan. “In the past, it hasn’t been designed at a micro level for just a household.”
Compensation consultant Alan Johnson of Johnson Associates in New York said the potential 3% grid-rate bump is, nevertheless, “dramatic” enough to get advisors’ attention.
“Three points is a lot,” said Johnson when briefed on the details of the plan by a reporter. “Morgan Stanley is signaling that [financial plans and asset gathering] are important to the client, to the business and to the advisor, and whether you agree or not, we’re moving significantly in this direction.”
Morgan Stanley is still adjusting its pay-calculation technology to make the changes work. Most parts of the 2019 plan will not be introduced until April, rather than the traditional January 1 start date, to allow for the adjustments, said people close to the plan.
The enhanced grid payouts, which follow the firm’s standard practice of paying partly in cash and partly in deferred compensation, will be effective in the month after qualification because of the firm’s “rolling trailing-12-month” production system, one of the sources said.
The new compensation plan also will triple to 15 basis points the credits broker receive on the average monthly cash-balance funds of customers who have active accounts at Morgan Stanley Bank, underlining company Chief Executive James Gorman’s continuing effort to fund the company with inexpensive customer bank deposits. Brokers whose bank customers are not “cash-management engaged,” meaning they do not buy products such as ‘ticketed’ money-market funds and have direct deposit, will continue to earn 5 basis points on cash balances.
In another prong of its beefed-up commercial bank aspirations, the new plan will “nearly” double the payout to brokers who meet mortgage and other customer-loan balance growth targets from January 1 to the end of the year, according to the memo. The current 35-50 basis points award will actually double to 1% at the upper tier, and is not capped, said people familiar with the plan. The current loan growth award is capped at $202,000.
Morgan Stanley executives are promoting the new comp program internally as all carrots and no sticks (in contrast to Merrill Lynch’s 2018 new-asset growth program). However, they are making an exception for “small household” accounts of $100,000 to $250,000, cutting the payout on such accounts to 25% if brokers do not create a monitored financial plan for the cohort. Brokers who do create plans for the “small” account holder will continue to pocket their standard grid payout rate and receive an extra percentage point, an incentive aimed at turning small accounts into larger ones.
Morgan Stanley will continue its policy next year of not paying brokers on household accounts under $100,000, said people familiar with the plan. Merrill Lynch withholds pay to brokers on accounts under $250,000.
In addition to releasing its plan early to prompt brokers to adopt financial plans and asset-gathering technology, Morgan Stanley executives are eager to tamp speculation that the company would tighten its payout policies in 2019, said people familiar with the rollout of the program.
Lumia’s memo also is directly conciliatory.
“We are eliminating certain ‘nuisance’ policies,” he wrote, pinpointing one that made brokers pay for computers and other equipment for their support staff.
“Our investment in you is not just technology and operations,” the memo says in a section reassuring brokers that the firm is keeping its grid breakpoints and payouts unchanged. “It is also about recognizing the additional time and effort it will take to incorporate the new capabilities into your practices to benefit your clients.”