Morgan Stanley CEO Sees Gold in Expiring Retention Bonuses

Those expensive retention packages that Morgan Stanley handed to Smith Barney brokers when it purchased their firm between 2009 and mid-2013 are expiring, giving top executives a new rallying cry for investors to buy its stock.

Chairman and Chief Executive James Gorman put a number on the savings on Wednesday, telling investors at a Morgan Stanley-sponsored conference that expiration of the forgivable loans should add 150 basis points to Morgan Stanley Wealth Management’s pretax profit margin starting in January 2019.

That equates to around $61 million per quarter based on the division’s first-quarter results (and compares with savings of about $100 million a quarter that Bank of America has estimated it captured as a result of the expiration of its retention loans to Merrill Lynch brokers last year).

Morgan Stanley’s wealth unit, which has 15,800 brokers, reported a 24% pretax margin in this year’s first quarter, up from single digits when Gorman became CEO in 2010. The former Merrill Lynch wealth executive has made a bigger bet on wealth management than his rivals through the Smith Barney purchase. The unit contributed 42% of the bank company’s revenue and 35% of its profit in the first quarter.

Gorman, a former McKinsey consultant, also said that new “digital” initiatives aimed at reducing branch processing costs and automating advisor client-outreach functions will bolster the bottom line.

He and other executives at the conference said cost-cutting opportunities in running the company’s 601-office branch system remain, even after the elimination of 221 retail locations and a 500-basis-point decline in non-compensation expenses between 2010 and the end of 2016.

“We have 14,000 people sitting in branches doing administrative work” while advisers spend 70% of their time on non-advisory functions, he said. Many of those functions could change if approached digitally.

Morgan Stanley has not yet set a target for the wealth division’s pretax profit margin as a result of its digital reconstruction, but Gorman noted: “We have those retention deal coming off in January of ‘19, so that’s another point-and-a-half of margin.”

He also endorsed the firm’s technology-assisted efforts to improve advisor productivity through targeted product marketing and new asset gathering that Naureen Hassan, chief digital officer of wealth management, outlined at the conference on Tuesday.

The “robo” investing platform will be aimed at children of the firm’s existing wealthy clients and at employees of companies that use its stock-management investing services, thereby eliminating fears of channel conflict that advisors may have, he and Hassan said.

“The old debate back in the ‘90s was you couldn’t do these in parallel because you’d be cannibalizing yourself, you’d have friction with the sales force, they’d think you were the enemy and they’d set up their own firms,” Gorman said. “Those days are over.”

Around $1.6 trillion of Morgan Stanley’s $2.2 trillion in customers assets are from those with more than $1 million at the company (with about $800 billion from the “ultra high net worth” with $10 million or more), he said, so brokers can handle a robo platform. “Our advisors are more than happy for us to have an additional channel if they have access to it, too,” he said.

Advisors also would do well to use the “smart data”-generated tools that the company is developing to automate their communicate with wealthy clients about investment and loans, he said. 

“Long-term, the business has a lot of upside because of the lending, because of deposits, because of the potential branch restructuring,” he said.

—Jed Horowitz contributed to this story.