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.
“I’ve never taken financial advisors off grid and neither has anybody else, to my knowledge,” said Morgan Stanley Chairman and Chief Executive James Gorman.
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.
This is the same James Gorman that told “The Gang of 25” who had signed a letter threatening to leave the firm over the 3D disaster that they could leave anytime they liked. True story.
I well remember the managers’ meeting in FL in 2008. He gleefully told a story about an FA who complained to him in an email. He called the manager and ripped her, telling her she had to track down the FA who was on vacation to apologize to him.
Jimbo has no bedside manner, can’t be trusted. At ML he didn’t believe in recruiting, crosses the street and begins to offer 300% deals.
was never a Jimmy G fan, got rid of Mulholland who 10 X the leader he was.
Shareholders probably love this guy, because he hit his promised profit margin goal. The advisors all despise him, because he is a pompous ass and because he essentially chained everyone to their desks by pulling out of that protocol agreement and now sics his legal dogs on anyone who tries to leave. I went independent and thank God I got out of there when I did. Much, much happier now.
Advisors and managers that don’t like Gorman are typically those that think like Omar and AOC. Gorman isn’t bobbing his head like the puppy dog noodles before him. He’s supporting them when it makes sense as a shared responsibility, and he’ s not shy about challenging when they’re acting like Marlon Brando in Apocalypse Now. As someone else here said , no one is a slave . There are plenty of alternatives to your disdain , so stop your incessant whining and move firms or , better yet , get half a brain and go independent already … or STFU. Oh wait , your tied to deferred Comp and your accounts aren’t really your accounts any more because you’ve been coasting on SMAs for years. My bad.
The comments on Jimmy G are by people who know and have observed him. He must have said hello to you in the elevator one day while you were headed to your cubicle. If you’re saying positive things about him in this group, you have as much of chance of being taken seriously as Madonna had trying to pass herself off as a virgin. Take a hike junior.
Shareholders must hate Jimmy G because the stock price has sucked. All Jimmy knows to do is cut. When is the last time he made an investment in anything? Compare the MS stock price to any other major bank’s stock price. It ain’t pretty at all.
James Gorman cannot be trusted. His only concern is JG. He puts his buddy Saperstein in charge of Private Client. He has never been a FA, knows nothing about sales, is rude to FA’s. The firm is run with smoke and mirrors. FA headcount is down, why they got out of protocol, they now count trainees and FA’s who are in deficit as producers. Infrastructure is horrible, no one knows what they are doing.
The first steps in taking advisors off grid based compensation is well underway at Morgan Stanley. Leave protocol. Run off all your big producers. Force clients and advisors into firm discretionary uma since Mike “l get all the calls right” Wilson portfolios have averaged 4% net of fees in this raging bull market. Start lowering the cash grid each year and adding deferred comp that vests in 10 years. Hire a consulting firm, preferably McKinsey, and have them tell you to leave the grid system then b*tchslap the small producers that are left at the firm and start paying them a salary plus a meager bonus. Only a blind fool would stay at Morgan Stanley.