Morgan Stanley reaps benefit of comp changes in Q1 earnings

In the first quarter since it began deferring more of its financial advisers’ pay, Morgan Stanley Wealth Management has begun to see the benefits of those changes as the firm’s profitability improved.
Compensation as a percentage of revenue — a key number that chief executive James Gorman has been focused on as part of efforts to improve margins — dropped to 58% in the first quarter from 60% in the fourth quarter. Compensation expenses dropped $66 million in the first quarter, to $2.23 billion from $2.29 billion in the fourth quarter, marking the first quarterly decline since June 2013.
That, in addition to other factors, helped the firm hit Mr. Gorman’s targeted profit margin of 22% well ahead of schedule. A year ago, the chief executive gave himself until the fourth quarter of 2015 to hit a profit margin of 22% to 25%.
This year, the firm changed the way it paid financial advisers by increasing the portion of pay that was deferred over an eight-year period. Compensation analysts expected that it could provide a short-term boost to the firm’s earnings because some of advisers’ pay would not have to be granted immediately. The firm would also be able to hold onto some of that pay when advisers left before their deferred compensation had vested.
In discussing the declining compensation expenses, the firm’s outgoing chief financial officer, Ruth Porat, cited the new compensation plan as well as the fact that financial advisers are doing more “non-compensable” business, including selling banking and lending products, which are not paid according to the traditional grid.
“Compensation expenses were down 3% in the fourth quarter due to change in the compensation structure as well as a revenue mix change with growth in non-compensable revenue,” she said.
A spokeswoman for the firm, Christine Jockle, did not return requests for comment or additional information.
Mr. Gorman said last June that he expects compensation to drop eventually to 55% of revenue, although he has not put a timeframe on that change.
Overall the firm’s first-quarter revenue of $3.8 billion was up 1% from the fourth quarter last year and 6% from the year-ago quarter. Profits of $855 million, however, rose 16% from last quarter and 25% from last year’s quarter.
Revenue per adviser ticked up to $959,000 (on an annualized basis) despite a loss of headcount. The firm’s adviser force dropped below 16,000 to 15,915, which was down 3% from a year ago.
Asked whether he thought that a proposal from the Labor Department that would put brokers working with retirement plans under a fiduciary standard would have an impact on the firm’s profitability, Mr. Gorman said that he did not expect any “meaningful impact on our business,” although he did expect some “changes in activity and more compliance-related costs.”