Morgan Stanley Struggles to Trim $5B Recruiting Loan Bulge
Morgan Stanley, the largest brokerage firm by headcount, is still deep in hock to its almost 16,000 advisors.
Recruiting and retention “loans” to its advisors totaled $4.9 billion at the end of last year, according to the firm’s 2015 10-K, which was filed in late February. Measured across the firm’s army of 15,889 advisors, that equates to an average of about $306,000 per advisor.
The amount decreased from $5.1 billion, or $319,000 averaged across the firm’s 16,076 brokers at the end of 2014 as the loans, which are given out as promissory notes, amortized or were forgiven. But the 10-digit figure shows how important big checks remain in recruiting retail brokers, despite the complaints of senior executives, said Alan Johnson, managing director of compensation consulting firm Johnson Associates.
“[Our] clients have always said that we really don’t want to do this, and then they do it as much as ever,” Johnson said. “It shows you how competitive the industry is. Firms want to attract good people, and they don’t want to lose the good people they’ve got.”
At competitor wirehouse UBS Wealth Americas, retention and recruiting loans rose 10%—around $300 million—to $3.2 billion as of the end of 2015, according to its annual regulatory filing. UBS has around 7,000 brokers in its wealth unit, just under half of the number at Morgan Stanley.
Although Bank of America’s Merrill Lynch and Wells Fargo’s Wells Fargo Advisors offer similarly sized “loans,” according to recruiters, the parent banks do not break out recruiting and retention loan data in their annual filings — a sign of how small the brokerage businesses are within the greater bank holding companies..
In a testament to the high cost of the loans, Morgan Stanley CEO James Gorman said in January that he expects a 1.5% improvement in profit margins, which were around 20% as of December 31, once the retention bonuses given out to retain Smith Barney advisors in the 2009 acquisition fully amortize in 2019. It’s not clear what portion of the almost $5 billion on Morgan Stanleys balance sheet represents retention loans, as opposed to those made for recruiting new advisors.
A spokesperson for Morgan Stanley declined to comment beyond the information provided in the 10-K.
Gorman and other wealth management industry executives have often complained about the high costs of recruiting from each other, conceding that it is nearly impossible to recoup expenses for upper-tier brokers. However, none has been bold enough to cut off the recruiting spigot lest they lose high production to competitors.
Morgan Stanley’s loans are structured as payments brokers own that amortize across two to 12 years, according to its 2015 10-K. The loans are forgiven in total if brokers stay at the firm for the full amortization period and meet certain production and asset hurdles.
“It’s incredibly enticing to the people getting it,” Johnson said of the deals. “I don’t know if there’s anything better.”
On the flip side, it’s become standard for firms to bring arbitration cases against brokers who jump ship without repaying the unamortized portion of the money they collected. In rare cases, brokers have prevailed if they prove they were recruited under false pretenses or have justification for breaking their employment contracts.
Brandon Neal, for example, won the right to keep the unamortized portion of the note he had received from Morgan Stanley, about $215,000, after arguing in a Financial Industry Regulatory Authority forum that false representations were made to him by the firm’s recruiters, according to an award decision Finra published on February 22.
Morgan Stanley last year set aside approximately $108 million in reserves to cover unrecoverable compensation loans, down from $116 million in 2014, its 10-K showed. The reserve as a percentage of total loans is very low in comparison with typical consumer loan reserves at bank companies.