EXCLUSIVE: Morgan Stanley Gilds Retirement Program for Top Producers
(Updates with additional details throughout.)
Morgan Stanley on Thursday unveiled a program encouraging top advisors to stay with the firm by adding 10% to 50% of their production to their post-retirement bonuses if they agree to pass their books of business to younger colleagues when they leave.
To lock them in, it is requiring eligible brokers who produce more than $2 million of fees and commissions annually to sign a “garden leave” contract that prohibits them from working at another firm for 90 days after resigning and to forego the bonus if they leave after enrolling. The program will be open to almost 800 qualifying advisers, said people familiar with the plan.
All large firms offer so-called sunsetting benefits aimed at prompting older advisers to hand their clients to younger ones in return for collecting a percentage of the receiving brokers’ payouts from those clients for about five years. Morgan Stanley’s enhanced Former Advisor Program (FAP) increases the potential amount of the firm’s contribution “by 10-50% of T-12,” according to a memo sent to the firm’s almost 15,655 brokers that was reviewed by AdvisorHub.
The increase would come in part by allowing retiring brokers to raise the maximum split they can collect from inheriting advisers under the current FAP program, a provision that allows top advisers in their first year of retirement to collect 80% of the 50% payout on their former clients’ business. The current maximum split is 70% of that payout.
Enrollment in the new program is optional, and the current plan will remain in place relatively unchanged. The trailing 12-month production-based bonus paid to brokers under the existing program, however, will be based on average annual revenue over the previous three years rather than in the year preceding enrollment. The cash award vests after ten years.
The enhanced award was developed at the behest of Morgan Stanley’s small cohort of $10 million producers who wanted more “monetize-my-book” cash in recognition of the business they had created, said the people familiar with the plan. The existing FAP requires participants to retire within two to four years of enrollment.
The enhanced plan, which will be offered as of January 1, 2019, is expected to be adopted by younger advisers who want a longer “runway” to building their retirement nest eggs than the maximum four-year accrual in the current plan, seek more control over their retirement investments and are willing to commit their careers to Morgan Stanley, said the people familiar with the new program. It will allow them to choose from a “fairly robust suite of investment options” and monitor them at will, one of the people said. Disbursements are allowed only after an adviser retires.
“[A] primary goal of the [existing] FAP is to help ensure your clients are looked after with the same degree of service they’ve always benefited from once you’ve made the decision to leave the industry,” Morgan Stanley’s brokerage salesforce head Vince Lumia wrote in the memo. “For your part, that decision takes time to plan and execute smoothly while sustaining your practice.”
The new program raises the award that advisers can collect after retiring from a flat 50% of their trailing-12-month production when they enroll to 100% of average annual revenue over three years if they produce $10 million or more. Those producing $5 million to $9.999 million are eligible for 75% of their qualifying three-year average production, while brokers generating $2-$5 million qualify for a 60-65% contribution, said the people familiar with the plan. Brokers in the lower tier do not have the option of managing their investments.
Brokers who move into higher tiers of production during the course of their employment would qualify for awards at the higher bonus contribution levels. Advisors opting for the enhanced plan do not have to declare a specific termination date when enrolling, but must give 12 months’ notice of their actual retirement.
Based on the approximately 800 advisors who would currently qualify for the program, it is expected to cost Morgan Stanley hundreds of millions of dollars more than what it currently expends under its FAP.
Compensation consultants said Morgan Stanley’s strategy is likely to succeed with successful brokers weighing recruiting bonuses from rivals.
“They’re trying to stop the $5 million advisor from leaving,” said Alan Johnson who runs an eponymous consulting firm in New York. “It forces brokers to think, and I would guess most people would sign up.”
The current FAP bonus of 50%, which will remain available to all advisers who generate over $2 million, is structured as a forgivable loan bonus agreement, as at most firms, with the loan amortizing over two to four years. All Morgan Stanley advisors are eligible for the commission-sharing part of the FAP plan once they leave.
The people familiar with the newly offered plan said it is not meant as a recruiting tool, but argued that its generosity and acknowledgment of advisors’ practice-monetization desires makes it superior to programs that competitors offer, and could be a lure.