Morgan Stanley’s FA Firings: ‘Savvy Strategy,’ Experts Say

This means new advisors face a lot of pressure and have become the focus of cost-cutting measures.

"The major wirehouses are aggressively looking to slash costs,” Elzweig explained. “Even for a very capable rookie, building a retail business is typically a long, hard slog.  Each of them needs to raise about $20 million just to gross about $300,000 and net about $120,000.”

In today’s environment, the wirehouses “simply don't have the patience that many newer brokers require,” the recruiter continued. “It's no longer good enough for a new advisor to hit the ground running – they've got to hit the ground flying and at warp speed.”

These aggressive asset and production targets represent key barriers to entry in the industry.  “Rookies don't get that much time to build a business.  As soon as they falter, firms cut them fast and take a shot with someone else,” Elzweig added. “Lower producers (below $300,000) usually get hit with 20-25% payouts to encourage them to leave.”

What’s prompting the wirehouses overall to enact such policies? It comes down to the size and associated costs of running the wirehouses in a recession-plagued world, the recruiter says.

“The post-crash era created a group of merged, gargantuan-size wirehouses with the biggest retail sales forces ever,” said Elzweig. “As they continue to invest in technology to upgrade and expand their platforms, the major firms are demanding higher levels of productivity from their brokers. This is a trend that will only accelerate in the years ahead."

To Danny Sarch of Leitner Sarch Consultants in White Plains, N.Y., the firing strategy represents another instance of Morgan Stanley culture pushing out Smith Barney culture.

“In the past, Morgan Stanley would let [lower producers] go, while Smith Barney would penalize them until they left,” Sarch (left) said in an interview. “Now, it’s clear things are moving along in the Morgan Stanley way.”

Unlike other experts, though, Sarch questions whether the firing will really save Morgan Stanley money. He acknowledges that, in some high-rent areas, it could make sense to get rid of brokers and close branches.

“Advisors are commission based,” said Sarch. “They are paid a nominal salary and benefits, but they are generally paid in commissions. I question the thesis that this may save the firms money – it may just make them look better” through a higher average productivity figure.

For Morgan Stanley, either outcome could be advantageous. Its stock continues to lag most rivals and major market indexes, its pre-tax profit on wealth-management operations declined in the first quarter to 10% and its return on average equity for the division trails that of key competitors, like BofA-Merrill.