Morgan Stanley CEO Pledges Loyalty to Grid-Based Payouts
(Recasts fourth paragraph to reflect Gorman’s notion that the Fed may be concerned about the permanence of higher expenses in Morgan Stanley’s wealth division.)
The head of the biggest wirehouse brokerage force indicated Tuesday he will not alter the grid-based payout system that links broker compensation to revenue produced.
He made the remark on an earnings call after an analyst questioned why the Federal Reserve Board appears to have a concern about Morgan Stanley’s projection of net revenue under stress conditions that the regulator modeled.
A “sticky,” high-cost compensation plan for the firm’s more than 15,600 advisers that wouldn’t change even during a crisis appears to be the only plausible explanation for the concern, he said, and it doesn’t make sense given Morgan Stanley and the wealth industry’s commitment to the self-funding, sliding-scale grid model.
Consultants and brokers in recent years have speculated that brokerage firms could shift compensation to a conventional salary-plus-bonus model to reflect the shift in broker roles from commission-based investment jockeys to financial planners who recommend firm-determined investments and sell mortgages and other bank products and services.
“We’re not going to do it,” a Morgan Stanley executive said Tuesday about plans to leave the eat-what-you-kill grid model.
Morgan Stanley’s wealth management division reported a 1.9% gain in second-quarter revenue from the year earlier quarter to $4.41 billion and pretax profit that rose 7% to $1.24 billion, beating analysts’ consensus revenue expectations.
Some analysts on the call expressed concern that net interest revenue, which has become more important with the shift to bank-product sales, fell 10% from this year’s first quarter and 3% from a year ago to $1.01 billion. The decline reflected mortgage prepayments, divergence between Libor and Fed Funds rates that impacted spreads on variable-rate loans and a greater-than-expected $10-billion outflow of customer money from deposit accounts, due partly to tax payments, said Chief Financial Officer Jonathan Pruzan.
But client loan balances in wealth management chugged up 2% from the first quarter and last year’s second quarter to $84 billion, driven by securities-backed loans, while wealthy clients have been embracing certificate-of-deposit and other rate promotions, Pruzan said.
New money flowing into fee-based accounts fell 34% and 36% respectively from the first and year-earlier second quarter to $9.8 billion, while commission revenue fell 11% from the first quarter but rose 5% from a year ago to $728 million.
“Retail investors remain cautious given record market levels, sharp intra-quarter market swings and heightened levels of uncertainty,” Pruzan said on the call.
Money in the advisory accounts, which Morgan Stanley and its rivals prefer to commission accounts because of the stable fees they generate regardless of trading appetites, remained at the 45%-of-total-asset level that they have been for several quarters. The level should rise to “50% and beyond” over time as the firm refines its “value-based pricing” schedule that reduces fees for higher asset levels, Pruzan said.
Total client wealth assets rose 4% over the second quarter to $2.6 trillion, due largely to market gains.
“[H]igher assets and loans more than offset the effect of lower interest rates,” Gorman told analysts.
Pretax profit in the wealth division, which was foundering at around 3% when the CEO joined Morgan Stanley to run wealth management in 2006, reached 28% in the second quarter on higher revenue and tighter expense control. (Bank of America-owned Merrill Lynch Wealth Management, whose advisors were once led by Gorman, on Wednesday reported pretax second-quarter profit margin of 26.4%. The BofA wealth and investment management division that includes Merrill and its smaller private bank, generated a 29% margin.)
Morgan Stanley’s brokerage count fell by 75 over the April-June quarter to 15,633 advisors. A spokeswoman would not comment on how many of those are in its training program, nor how many experienced advisers it has lost to competitors or retirement in recent quarters.
Average annualized revenue of brokers, based on first-half production, rose 2% from last year to $1.125 million, the company said.