Farewell Fiduciary Rule? Morgan Stanley Sweetens Recruiting Bonuses
(Updates 7th paragraph to say that judges denied attempts of three states and AARP to overturn dismissal of the DOL fiduciary rule.)
The Trump Administration’s retreat from enforcing the Department of Labor’s fiduciary standard now appears to be benefiting brokers’ recruiting packages.
Morgan Stanley has begun offering selected brokers the opportunity to earn higher bonuses for bringing customer assets from their former firms by calculating previously excluded retirement account revenue into its asset-transfer bonuses.
A broker who transfers 70% to 150% of nonretirement account assets from their former firm will be awarded special annual bonuses of 10% of all revenue they produce at Morgan Stanley if they hit various time targets over five years at the firm.
The bonuses previously excluded IRA, SEP and other retirement account revenue in determining the payout base calculation to conform with the DOL’s ban on back-end recruiting bonuses tied to asset transfers and sale. A typical big-firm broker generates about one-third of his or her business from retirement accounts, said Andy Tasnady, a compensation consultant in Long Island.
The DOL fiduciary rule approved in 2016 considered back-end incentives “acute conflicts of interest” by motivating brokers to sell what is best for them rather than to recommend what is in their customers’ best interests. Almost all brokerage firms as a result cut or entirely withdrew entirely bonuses tied to sales and asset-transfer goals after the DOL offered its conflict-of-interest interpretation in November 2016, leading to a big decline in broker-hopping among firms.
Morgan Stanley, which more than halved some of its recruiting deals, reverted to offering the potential for a higher back-end bonus about two weeks ago, recruiters and others familiar with the offer said.
The turnaround reflects the change in the regulatory climate. The DOL in March said it would no longer enforce the fiduciary rule, which took partial effect last summer and a panel of Fifth Circuit Court of Appeals judges in Texas vacated the rule in March. The full panel of Fifth Circuit judges on Wednesday, May 2, denied efforts by AARP and the attorneys general of California, New York and Oregon to challenge the decision.
“The timing is very interesting,” Jason Roberts, a lawyer and head of consulting firm Pension Resource Institute, said of Morgan Stanley’s recalculation.
Many corporate clients, he said, are contacting him about whether they can ease up.
The fiduciary rule, for the time being, remains in effect, he said, and he is advising a conservative approach so as not to trigger questions from other regulators, including the Securities and Exchange Commission. The SEC last month put out for comment a ‘best interest’ proposal that does not contain a fiduciary requirement but requires policies “reasonably designed to identify and disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives.”
Morgan Stanley insists that it remains in compliance with the DOL’s conflict-of-interest rule because the asset-transfer hurdle targets on which the back-end bonuses are based exclude retirement account assets. The DOL rule applies only to retirement accounts.
“Changes to our recruiting offer are aligned with the DOL rule and were made to ensure that we remain competitive in the marketplace,” Morgan Stanley spokeswoman Christine Jockle wrote in an email.
Morgan Stanley continues to offer selected top recruits upfront cash of as much as 150% of all revenue they produced in the previous year at their former firm, including money collected on retirement accounts.
A spokeswoman for Wells Fargo said the firm has not made any structural changes to its deal although it is “always watching the changing landscape.”
A spokesman at UBS declined to comment on whether it has adjusted its back-end recruitment offers, and a spokeswoman at Merrill Lynch did not respond to a request for comment.
“It may be [that firms] now are not worrying as much about the risk,” Tasnady said. The compensation consultant said he had not been briefed on Morgan Stanley’s change.
Morgan Stanley’s pivot indicates that the firm has re-entered the recruiting game after slashing hiring targets last summer. Rivals UBS Wealth Americas and Merrill Lynch also have retrenched on recruiting.
“Fixing the back end is a nice way of sweetening the pot,” said Jonathan Manela, founder of Greenwich, Conn-based recruiting firm Edge Strategy Group. “It’s a testimony to Morgan Stanley’s appetite to continue to stay aggressive and competitive in the marketplace.”
Managers at Morgan Stanley and other recruiters say that the firm is being highly selective but nevertheless see the sweetened incentive as a counterpoint to the firm’s controversial decision last November to withdraw from the Protocol for Broker Recruiting.
The so-called Prexit decision locks brokers into the firm by prohibiting them from taking client-contact information should they leave, and makes it harder to incentivize outsiders to join.
“As we have said all along, we continue to selectively recruit advisors who are attracted to our leading platform,” Jockle said in an e-mail.
The back-end bonuses Morgan Stanley offers vary according to a broker’s production and experience in the industry, and can be sweetened even further by hitting asset-transfer targets ahead of schedule. Brokers in the top three production quintiles at their former firms who transfer 70% of customer assets within six months, for example, qualify for an “early early asset award” of 25-50% of their trailing-12-month revenue.
The typical back-end bonus at Morgan Stanley awarded after at least five years is 100% of trailing-12 month production for a top quintile producer.
—Jed Horowitz contributed to this article.