Morgan Stanley CEO is happy that brokers are staying put

James Gorman, chairman and chief executive officer of Morgan Stanley, speaks during Bloomberg's fourth-annual Year Ahead Summit in New York, U.S., on Tuesday, Oct. 25, 2016. The summit addresses the most urgent topics for 2017 and beyondhow power shifts in global politics will affect free trade and financial markets; industry-moving innovations in AI, robotics, and life sciences; the biggest investment opportunities for 2017; and how organizations are working to increase diversity, solve the skills gap, and decrease the wage gap. Photographer: Michael Nagle/Bloomberg

Firm has seen little attrition since it dumped the broker protocol last fall, Gorman says.

James Gorman, CEO of Morgan Stanley, loves life at his firm eight months after it dumped an industry agreement called the protocol for broker recruiting, which makes it easier for advisers to leave to join another broker-dealer.

For decades, competition for broker and adviser recruits drove growth strategies at Wall Street firms like Morgan Stanley.

That changed last year. In the spring of 2017, Morgan Stanley, Merrill Lynch and UBS Financial Services said they were reducing their reliance on recruiting experienced advisers with big signing bonuses and instead making changes that would emphasize building staff in-house. Then in October, Morgan Stanley said it was leaving the recruiting protocol, with advisers being told that the firm would enforce client confidentiality and non-solicitation agreements.

Mr. Gorman made plain his distaste for recruiting, which is costly and time-consuming, during a conference call Wednesday morning to discuss the firm’s second-quarter earnings.

“I’ve sort of watched this for about 25 years,” he said, calling brokers moving from firm to firm a “kind of crazy, weekly event” that occurred in the past.

After years of widespread industry consolidation, advisers jumping from firm to firm for a recruiting bonus is less prevalent, Mr. Gorman noted.

“Now there’s basically 3½ or four big firms, and the amount of recruiting they’re doing from each other is very small, and it’s small for good reason though,” he said in response to a question about Morgan Stanley’s perception of the market for financial adviser recruiting. “We don’t need to recruit a lot of people. We’re growing organically. We’re very comfortable with that.”

To Mr. Gorman’s point, the number of advisers at Morgan Stanley has been stable. Wednesday the firm reported 15,632 advisers under its roof; a year ago, the firm reported 15,777 advisers. In the past 12 months, Morgan Stanley’s adviser head count has declined less than 1%.

During the second quarter, advisers produced an average annualized revenue of $1.1 million.

“It’s probably the first time Morgan Stanley has seen these low levels of attrition in a decade or more,” said Casey Knight, an industry recruiter. “The firm must be excited about stopping the bleeding from the high-cost recruiting deals. That will help the bottom line.”

Mr. Gorman acknowledged the movement of some advisers at Morgan Stanley and other wirehouses to set up their own independent RIAs.

“There’s always that prospect of somebody setting up a boutique on their own,” he said. “But that’s where the power of the franchise, the quality of the research, the capability, the technology, the expense, the compliance, all of these things lead people to want to be part of an institution like ours.”

Morgan Stanley has seen “very little attrition, and as a result, we are doing very little recruiting,” Mr. Gorman said. “We like growing in-house and we’re doing that successfully, and clearly, it’s an economically much better proposition.”