Morgan Stanley Burned in Q4 by Deferred Comp Program
The outsized deferred-compensation program that Morgan Stanley instituted in 2015 came back to bite it last quarter, cutting revenue in the company’s wealth management division by 5.5%, the bank said on Thursday.
Net revenue in the company’s biggest business unit as of yearend fell $263 million to $4.1 billion from the comparable 2017 fourth quarter, Morgan Stanley said as it reported overall earnings that were below analysts’ expectations.
The decline in wealth management revenue reflected difficult markets at the end of the year but was “principally driven by losses related to investments associated with certain employee deferred compensation plans,” the company said.
Morgan Stanley Chairman James Gorman did not discuss the investment losses associated with the deferred comp pool, but acknowledged that the multi-billion-dollar decision in 2015 to defer as much as 10% to 11% of employee compensation for up to six years hurt the company as well as certain employees, particularly those in junior-level positions.
“We were pushing way too much compensation into future years,” Gorman said in a conference call with analysts. “We were mortgaging the future, and I just don’t think that is a good way to run a railroad.”
The company said that it has reduced the amount of bonus money it requires employees to defer, a decision that affected fourth-quarter compensation costs it recognized for its populous wealth management unit. Compensation costs and benefits in wealth management represented 55% of the unit’s net revenue in the fourth quarter compared with 31% in its institutional division and 47% in its investment management business.
A company spokeswoman declined to provide details of the changes in the deferred requirements. The program has been particularly unpopular with Morgan Stanley’s brokerage force of 15,694 representatives. The brokerage count at the biggest U.S. “wirehouse” firm is up 39 from the end of the third quarter but off by 18 representatives from the end of 2017.
Pretax profit from continuing operations in wealth management fell 12% in the fourth quarter from a year ago to $1.01 billion, and was down 15% from the third quarter of 2018.
Brokers attracted fewer assets to the firm’s fee-based advisory platform, with “flows” down 22% from the fourth quarter of 2017 to $16.2 billion as customers moved money into cash and bank deposits. Revenue from advisory accounts nevertheless climbed 5% from a year earlier to $2.6 billion as fee-based accounts inched up to 45% of client assets from 44% a year earlier.
Transactional revenue continued its long-term decline, falling 47% to $422 million. Wealth management customers shifted from commission accounts to cash, made fewer fixed-income trades and participated in fewer investment banking deals, the company said. However, the bulk of the commission revenue decline related to the deferred compensation plan investment program.
(Bank of America on Wednesday said that customers moved $6.2 billion out of fee-based advisory accounts at Merrill Lynch and its U.S. Trust private banking unit while putting $17 billion into Merrill brokerage accounts.)
Morgan Stanley ended 2018 with $2.3 trillion of customer assets, 3% lower than 12 months earlier and—in a sign of the market turmoil in November and December—8% lower than at the end of last year’s third quarter. Annualized revenue per broker fell 6% from the year-earlier quarter, and from the third quarter, to $1.06 million.
In a sign of the broad trading problems that affected Morgan Stanley companywide in the fourth quarter, wealth management’s pretax income of $1.01 billion outpaced the $780 million pretax profit in the company’s institutional securities division (trading and investment banking) and the $74 million pretax profit in its investment management unit.
The wealth unit also led the other divisions in net revenue, the first time since the fourth quarter of 2015 that the division has been the largest in both profit and revenue.
Gorman repeated his often-stated belief that wealth management and investment management serve as ballasts to the company’s more volatile trading and investment banking business, and also said he is eager to make small acquisitions in areas such as corporate stock-plan management.