Wirehouses Held Prisoner in Broker Bonus Wars

A recent Bloomberg article, Morgan Stanley Joins BofA in Broker Recruiting Truce, heralds the dawning of a new day of peace and profitability, where large wirehouses won’t squander their resources on large compensation packages for advisors.

But veteran recruiter Mark Elzweig says that late October article is already extremely out of date, assuming it was ever more than just “wishful thinking” on the part of wirehouse execs eager to protect their bottom lines.

Bloomberg reported that Morgan Stanley paid out 57% of its wealth management revenue as compensation in the third quarter, down from 63% the previous year, quoting its CEO, James Gorman, as describing broker bonuses as “a tax on the industry.”

But the principal of the Mark Elzweig Co., a recruiter for 28 years, says that Wall Street pay packages are as generous as they’ve ever been. In fact, his periodic “Elzweig Deal Forecast” shows 5 shiny suns, his highest rating, and shows that total pay packages for wirehouses rise into the 300% range currently.

“The amount [the wirehouses] are in fact paying has gone way higher than I ever dreamed it would go,” he tells ThinkAdvisor in an interview. “Barring a radical collapse of the stock market, I don’t see that changing.”

So how is it that wirehouses declare a truce yet, in Elzweig’s estimation (or Hamlet’s) “it is a custom more honored in the breach than the observance”?

Elzweig compares the situation to the OPEC cartel, which has frequently hammered out agreements among oil producers as to how much they will charge for a barrel of oil, to boost their profitability, but where each member has a perverse incentive to capitalize on its own excess supply through covert side deals.

Elzweig says a similar gentlemen’s agreement was attempted in the 1990s, between Sandy Weill, then CEO of Smith Barney, and his Merrill Lynch counterpart, Dan Tully.

“They decided that upfront money was some kind of evil that had to be ended,” he recalls. “The wirehouses somehow made a pact, a tacit agreement that everybody was going to stop paying.”

Before long, however, somebody discovered: “‘They took two of our guys in the Midwest, now we can take two of their guys in the Midwest; within six months it’s all unraveled,” Elzweig says.

But the Manhattan-based recruiter insists the situation today is far less favorable to a truce in the recruitment wars.

“Right now wirehouses [face] so many people interested in going independent, regional firms have stepped up and are paying more than before. They’re all dealing with an aging and shrinking sales force. Cerulli says wirehouses are losing 2.5% of their advisors per year and the industry as a whole is losing 1.2% per year.