Ka-Ching! Recruiting Slowdown Fattens Brokerage Bottom Lines
Big brokerage firms’ recent decisions to retrench from recruiting experienced advisors have the double benefit of lowering signing bonus expenses and bolstering retention, executives at Morgan Stanley said on Wednesday.
“Attrition and recruiting have clearly slowed down,” Chief Financial Officer Jonathan Pruzan said on a conference call with analysts after Morgan Stanley reported an 11% jump in second-quarter earnings. “That’s helpful in terms of ins and outs…and obviously been very helpful to the business.”
When advisors leave, “a good chunk of their books go with them,” he said, explaining the “out” side of the equation.
Morgan Stanley, the world’s biggest wealth management firm as measured by its 15,777 brokers, did not break out its retention numbers but said advisor headcount has declined by 132 in the past 12 months.
Chairman and Chief Executive James Gorman, who formerly ran Merrill Lynch’s retail brokerage business, applauded the recent decisions of the big players to end their zero-sum game of expensive recruiting from each other. “The deal structures have become, shall I say, more sensible,” the Australian native said. “There was a bit of a crazy period there.”
Companies in recent years had offered signing bonuses that could reach three times the multi-million-dollar annual fees and commissions that top brokers produced in the previous twelve months. Those deals have been cut back to closer to double such “trailing-12” revenue, and have further been diluted by the exclusion of retirement-account revenue to avoid violating the Department of Labor’s new fiduciary rule.
UBS initiated the hiring-war retrenchment last summer, announcing a 40% cut in its recruiting budget. Merrill Lynch and Morgan Stanley followed this year with plans to freeze recruiting of veterans and focus on hiring less experienced brokers at lower pay levels.
The changes were driven in part by concerns over mounting levels of “forgivable” recruiting loans that were depressing the balance sheets of the wealth firms’ parent bank companies.
Morgan Stanley reported $4.7 billion of such loans at the end of last year. UBS AG has been whittling away at some $3 billion of loans that accumulated as its former U.S. wealth management executive was expanding his realm.
Wells Fargo Advisors, the U.S.’s second biggest brokerage firm as measured by its 14,527 brokers, is the only one of the four so-called wirehouses that has not announced a recruiting pullback in the past year. Its brokerage force has been eroding, however, since last year’s disclosure that Wells Fargo Bank employees had opened thousands of unauthorized bank and credit card accounts for customers in order to meet production quotas and qualify for bonuses.
Wells Advisors’ broker headcount fell by 138, or 1%, in the second quarter and was off 3% as of June 30 from 12 months earlier.
Headcount at UBS Wealth Management Americas as of the end of March was down 2% to 6,969 brokers from 7,145 a year ago, according to the parent company’s most recent earnings report.
Merrill Lynch, which had about 16,000 brokers in its Thundering Herd five years ago, grew its brokerage force in this year’s second quarter by 254 to 14,811 after a decline of 145 in the first quarter. On June 1, it froze its recruiting offers to big producers.
The hiring pullback reflects, in part, a contraction in the broker-dealer universe. “Frankly, there are fewer competitors,” Gorman said, noting that Morgan Stanley’s DNA includes strains of Dean Witter Reynolds, Robinson Humphrey, Legg Mason, Smith Barney, Shearson, Lehman Brothers and E.F. Hutton.
“And there are probably some that I’m missing,” he added.
Even with the hiring contractions, he noted, industry attrition rates of about 1% indicate that three or so advisors are moving a week from each large firm, considering that “major competitors” have 10,000 to 16,000 advisors.
“There will always be recruiting,” Gorman said. People have a right to go work where they want to work.”
Separately, Pruzan reiterated Gorman’s projection from earlier this summer that Morgan Stanley’s wealth management business will add 1.5 percentage points to its pretax profit margin of its wealth management business once retention bonuses paid to Smith Barney brokers fully expire in January 2019.