Broker-Dealer Executives “Shocked, Shocked” Over DOL Bonus Decision
Big brokerage firms rushed to rescind recruiting offers late Thursday evening and Friday after learning that the Department of Labor considers deferred-payment bonus agreements a violation of its new conflict-of-interest rules.
Morgan Stanley led the parade with a Thursday afternoon call to its sales managers instructing them to suspend all deals and offer no new ones until it determines how to comply with the DOL’s finding that bonuses tied to sales and asset-gathering targets over four to five years are not in clients’ best interests.
Although the DOL rule governs only retirement accounts, brokers and outside recruiters recounted tales on Friday of red-faced managers nationwide rescinding offers at Morgan Stanley and its rivals. (A Texas veteran said his Morgan Stanley branch manager handed a contract to a prospect at 2:45 pm and pulled it back at 3:15 pm.)
Wells Fargo Advisors held conference calls into the early morning on Friday with regional presidents and market managers about the need to freeze recruiting and unwind deals, said several brokers. (A Wells manager said he was told to pull back an offer to a $3-million team.)
Merrill Lynch, which recently caused a stir by prohibiting commission-based retirement accounts to accommodate the DOL’s soon-to-be-effective fiduciary rule, was set to announce similar policies on Friday, said two people familiar with its plans.
While headhunters and branch managers swapped tales of embarrassing phone calls and fretted about the future of their recruitment-centered livelihoods, senior executives were undoubtedly celebrating. For years they have been lamenting the futility of paying supposedly top-producing brokers million-dollar signing bonuses only to see them jump to another competitor when their contract period nears an end. It now appears that the government has effectively ended the brutal recruiting wars.
“These guys probably had a party last night,” said John Straus, a former executive at Morgan Stanley and UBS Wealth Management Americas. “This is a huge event in the wirehouse world, because the DOL gives them air cover on deals they hate.”
UBS reported Friday that the balance sheet of its U.S. wealth business is burdened by $3.2 billion of forgivable recruiting loans. Morgan Stanley ended 2015 with $4.9 billion of such loans, according to a regulatory filing.
“You can’t make money on a 300% deal,” said a 30-year veteran of Merrill and Morgan Stanley, referring to upfront and back-end payments that can total three times the million-dollar-plus revenue a top broker can generate in a year. ”Having to carry that receivable is killing them.”
Headhunters and brokerage veterans said that recruiting will undoubtedly revive over the next few months, though deals will be substantially different in size and formulation. Under the new DOL guidance, firms also will have to put recently hired recruits with back-end payment packages on heightened supervision.
Upfront payments that compensate recruits whether or not they meet sales or asset-growth expectations are likely to be raised from the approximately 100-150% of trailing 12-month revenue currently in vogue to partly compensate for the demise of back-end deals, some said.
“The most likely scenario is to goose upfront payment a little, but I think the absolute deals are coming down,” said Straus, the founding partner of FallLine Securities, which caters to newly independent advisors.