Morgan Stanley will boost savings with broker-protocol exit, UBS analysts say

Morgan Stanley's decision to exit the broker protocol for recruiting at the end of October will result in savings on recruiting and boost the bank's bottom line, according to a report from analysts at UBS Securities, a competitor that has also recently left the protocol. In a report released Thursday titled "Exiting broker protocol represents next leg of the [wealth management] margin story," two UBS analysts, Brennan Hawken and Adam Q. Beatty, wrote: "We view the withdrawal of firms from the broker protocol agreement as a positive for [wealth management] margins, potentially adding another 250 [basis points] to margins over the next three years." They added that about two-thirds of those savings could stem from next year's expiring of nine-year forgivable loans that Morgan Stanley gave to Smith Barney brokers after it bought the firm in 2009. "Importantly, this does not assume recruiting loans decline to zero, as firms are likely to continue recruiting, just at a slower pace and with smaller recruiting packages," the two analysts wrote. Mr. Hawken and Mr. Beatty said they estimate a potential five-cent earnings per share increase to Morgan Stanley's bottom line in 2018 and 15 cents in 2019. "These changes are driven by a lower comp rate in [wealth management], as tailwinds from reduced loan amortization are more likely now that [Morgan Stanley] has exited the protocol agreement," the analysts wrote. A spokeswoman for Morgan Stanley, Margaret Draper, did not return a call to comment. Morgan Stanley told its employees at the end of October it would no longer work under the protocol, leaving the bank open to criticism from some of its advisers. UBS Wealth Management Americas then followed Morgan Stanley's lead, and last month told its almost 7,000 advisers it was leaving the protocol as of Dec. 1. About 1,500 firms are part of the agreement, which was created more than a decade ago to limit lawsuits against brokers when they left firms. The protocol was established in 2004 by a handful of large firms and subsequently picked up by many smaller ones. It opened the floodgates for brokers to move from firm to firm, often lured by big signing bonuses that have proven expensive for large firms like Morgan Stanley.