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Industry Spotlight > Wirehouse Firms

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

By Janet Levaux

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Morgan Stanley’s move to institute a second round of firings this year is being praised by industry consultants and recruiters as a step that makes sense for the brokerage group, though it certainly will cause some pain and suffering in the advisor population.  

“It seems like a savvy well-thought-out strategy to refine its FA base to only those able to generate profitable revenues within some reasonable time period,” said Chip Roame (left), head of Tiburon Strategic Advisors in California, in an interview with AdvisorOne.

“Its FA base is huge, so it likely can use some trimming,” Roame continued. “If 300 job cuts are made out of a total headcount of 17,800 advisors, this represents a cut of less than 2% – which is minor.”

After letting several hundred underperforming reps go in March, Morgan Stanley’s CFO Ruth Porat said last week that it would likely continue to trim weaker brokers and could go below the 17,500 FA mark.

Morgan Stanley currently tops the wirehouse advisor charts in terms of the number of advisors. Merrill Lynch, for instance, has about 15,700. Both firms have more the $1.5 trillion in assets under management, or about $98 million in AUM per advisor.

However, Merrill’s advisors have an average yearly fees and commissions, or production, of $931,000 vs. $767,000 per Morgan Stanley FA.

Morgan Stanley’s revenue bars of $25,000 after three years and $75,000 after five years “are reasonable (vs. the firm’s average of $767,000),” explained Roame. “I'd assume an FA who does not hit those figures would always underperform the average, so it’s logical – if the firm’s goal is to maintain or boost the average.”

And Morgan Stanley may not be the only wirehouse that will resort to trimming advisors in 2011 and other aggressive moves to boost sales and overall financial results, other experts say.

Wirehouse Crunch

“Morgan Stanley probably moved first on cutting lower-end producers, because it is under pressure to both raise its stock price and realize the pre-tax margins and cost savings that James Gorman promised as a result of the merger with Smith Barney,” said Mark Elzweig (left), head of a New York-based executive-search firm, in an interview. “Then, of course, there's the matter of catching up to Merrill Lynch's higher productivity per broker as measured both in client AUM and gross commissions.”

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. 

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