Morgan Stanley and Bank of America Corp., owners of the world's largest brokerages, say the days of paying big bonuses to lure each other's brokers and keep their own in place may be ending.
James Gorman, Morgan Stanley's chief executive, said last week on a conference call that compensation costs may fall as financial advisers switch firms less frequently. Bank of America won't offer new retention bonuses to Merrill Lynch's top performers after payments tied to the takeover of the brokerage expire in about two years, John Thiel, the unit's chief, said in an Oct. 14 interview.
A slowdown in recruiting may boost brokerage profits, which have long been limited by competition for top advisers. Some have been offered several times their annual paycheck as an incentive to defect to a rival and bring their clients.
No wealth management company can hold down the bonuses on its own, according to Alois Pirker, research director at Aite Group LLC.
“This might be the time that the problem gets tackled,” said Mr. Pirker, whose firm specializes in the financial services industry. “The goal has to be to move away from this or at least reduce it to a more reasonable level.”
Morgan Stanley, which built the world's largest brokerage with 16,500 advisers by acquiring Dean Witter and Smith Barney, said the firm paid out 57% of its wealth management revenue as compensation in the third quarter, down from 63% a year earlier. The bonuses given to brokers during the turmoil of the financial crisis amounted to a “tax on the industry,” Mr. Gorman said.
TURNOVER DROPS
“That level of turnover has dropped significantly and we expect it to continue to drop,” Mr. Gorman said on the Oct. 18 call to discuss quarterly earnings. “So that reduces your overall compensation costs, because obviously recruiting deals can be very expensive.”
Merrill Lynch lost the fewest financial advisers to competitors in the third quarter since the end of 2010, according to spokeswoman Susan McCabe. She declined to give the number.
Bank of America, which doesn't disclose the compensation ratio for its 14,000-broker Merrill Lynch unit, said its profit margin on wealth management was 25.5% in the third quarter. It reached 27.6% in the previous three-month period, the highest since at least 2007, according to data compiled by Bloomberg.
BofA rescued Merrill Lynch with a takeover bid during the 2008 credit crisis and awarded bonuses to more than 6,000 brokers to keep top performers from joining competitors. The advisers must give up part of the money if they leave within seven years. Mr. Thiel said he won't offer new bonuses when those expire, a decision that may boost margins.
“We have no intention of doing that,” Mr. Thiel said. “Every firm has experienced turnover in the last three or four years with people who had a retention package, so my question is, 'Did it really work?'”
UBS AG, whose 7,100-adviser brokerage has been run by Robert J. McCann since 2009, said it spent $171 million in the second quarter on recruitment bonuses that are accounted for over time, or 9.5% of its operating income for the period. Personnel expenses, including the bonuses, amounted to 70% of operating income.
“That's a huge amount,” Mr. Pirker said. The firm hired “quality advisers, there's no doubt about it, but at a price.”
SLOWER PACE
UBS isn't doing as much recruiting as it did under previous management, said Paul Santucci, chief operating officer for wealth management. Under Mr. McCann, UBS is focused on luring away “the best talent on the Street or in a specific marketplace,” Mr. Santucci said.
Competition among firms has been “slower this year than it was in the past,” he said, declining to discuss details of the bonuses UBS pays to recruit brokers.
A rule passed by regulators last month may make brokers more reluctant to switch jobs. The Financial Industry Regulatory Authority Inc. voted in September to make brokers disclose how much their new employer paid them to defect.
Morgan Stanley and Merrill Lynch backed the plan.
Stifel Financial Corp., with more than 2,000 brokers, said in a letter to Finra that the proposal was anti-competitive and would discourage brokers from changing jobs even when that would be better for clients.
Brokerages are still recruiting from each other to replace financial advisers who retire because internal training programs aren't producing enough successful brokers, according to Danny Sarch, president of recruiting firm Leitner Sarch Consultants Ltd. They're dangling payments of 300% of annual production, or about six times take-home pay, for top producers, he said.
“I don't think the firms can fight supply and demand,” Mr. Sarch said. “It's wishful thinking until the industry shows an ability to train effectively.”
Mr. Thiel said he hopes to get the graduation rate for his firm's 42-month training program up to around 40% by putting some trainees in bank branches. Almost half the participants quit or were fired in the past year, a result of expanding to about 5,000 trainees under his predecessors and subsequently reducing the size of the program, he said.
“It's hard to train and develop that many people,” Mr. Thiel said.
(Bloomberg News)
