Morgan Stanley reports a loss of advisers after exiting the protocol for broker recruiting

The firm said it lost 47 brokers in the fourth quarter, the most in any quarter of 2017

Jan 18, 2018 @ 2:00 pm

By Bruce Kelly

Morgan Stanley lost 47 brokers in the fourth quarter, the same quarter it clamped down on advisers leaving by backing out of the protocol for broker recruiting.

The number of brokers leaving in the fourth quarter was the most in any single quarter of 2017 and the timing of the blip made "perfect sense," said Danny Sarch, an industry recruiter. "Any adviser who was thinking about leaving departed altogether when the company said they were leaving the protocol," he said.

According to its fourth-quarter earnings report, which the company discussed with analysts Thursday morning, Morgan Stanley reported 15,712 financial advisers at the end of last month, compared to 15,759 at the end of September. While the decrease in advisers represents less than half of 1% of the firm's sales force, it was the biggest decrease of the year.

Morgan Stanley's headcount of advisers was remarkably stable throughout 2017. The company reported 15,763 advisers at the end of 2016, 15,777 advisers in the first quarter of last year and the same number in the second, according to earlier quarterly reports.

Morgan Stanley said at the end of October that it was leaving an industry agreement known as the protocol for broker recruiting, making it more difficult for advisers to leave the firm with their clients because they faced the potential of a lawsuit. Before the 2004 agreement, it was common for large firms like Morgan Stanley and Merrill Lynch to sue advisers when they left, at times freezing clients from trading in their accounts.

Christine Jockle, a Morgan Stanley spokeswoman, declined to comment when asked about whether the loss of brokers was a result of the firm leaving the protocol for broker recruiting.

RETENTION BONUSES

Morgan Stanley CEO James Gorman said the nine-year retention bonuses that thousands of advisers received when Morgan Stanley bought Smith Barney from Citigroup Inc. in 2009 during the financial crisis will run their course by next January, reducing the firm's expenses.

Mr. Gorman said those bonuses were essentially one-time, event-driven retention agreements. Morgan Stanley put the Smith Barney advisers through a difficult transition, including a new technology platform, which made for a unique situation in which the firm was asking the advisers to transition their clients to new systems, Mr. Gorman said. In the normal course of business, there aren't retention bonuses for people to keep doing what they are already doing, and that's true for bankers, traders, and financial advisers, Mr. Gorman added.

Meanwhile, record stock markets have been good to Morgan Stanley, Bloomberg News reported earlier.

Fourth-quarter wealth management revenue climbed 10% to $4.41 billion, exceeding the $4.22 billion estimate of Jason Goldberg, an analyst at Barclays. Pretax profit in the unit set a record for the fourth straight quarter.

The firm's wealth management fees climbed to a record in the fourth quarter as the S&P 500 Index reached an all-time high. The company beat its target cost ratio for the year and posted the highest profitability under Mr. Gorman, who has pinned his strategy on the crisis-era acquisition of Smith Barney.

Morgan Stanley has been moving more wealthy clients into fee-based accounts that are priced on asset levels rather than activity, boosting results as markets rise. Revenue from wealth management moved closer to parity with the institutional-securities business than at any point since 2013.

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