Morgan Stanley (MS) is moving to defer more compensation for its advisors in 2015. But just how financial advisors will react to the shift is debatable, experts say.
With the changes, Morgan Stanley’s 16,162 advisors could see 1.5% to 15.5% of their total bonuses paid in cash and stock deferred in 2015 as part of the wirehouse’s unified pay grid. This shift entails an average shift of about 2 percentage points in deferred comp next year vs. this year, according to the company.
Morgan Stanley’s move seems aimed at retaining advisors, simplifying the firm’s compensation plans and even saving it some money, industry observers say.
“What I know overall is that this is a very modest change to a bonus,” explained recruiter Mindy Diamond of Diamond Associates in Chester, New Jersey, in an interview with ThinkAdvisor.
“It was done to make the pay grid easier to understand, and more firms will do the same,” said Diamond, who does recruiting work on behalf of Morgan Stanley. “Regulators are pushing for more deferred compensation,” as it may be seen as being better aligned with client interests than cash payments.
While she sees the shift as “largely a nonevent,” others paint a different picture.
“It’s a big company, so even a modest change can add up,” said compensation consultant Andy Tasnady of Tasnady Associates in Port Washington, New York, in an interview. “If you’re doing $10 billion in sales, a 1% shift from cash to deferred compensation is $100 million. That has a profit-and-loss benefit.”
Of course, that means less money in an advisor’s pocket come January 2016.
“I hope a large number of advisors don’t have that much more deferred compensation than cash, because advisors are not happy if they see cash taken away,” Tasnady said.
As an example, a rep with fees and commissions of $1.1 million and who has been with Morgan Stanley for 10 years probably has about a 48% payout, or $528,000, according to The Wall Street Journal. Some 8.3% of that, or $44,000, would be deferred. In 2016, 10%, or $52,800, could be deferred.
“There could be segments where [the deferral] is more than the advisors would like,” he explained, especially younger reps who have lower length-of-service bonuses.
The amount to be deferred is likely to vary widely across Morgan Stanley’s advisor force, experts say.
“If you’re getting around $40,000 a month in cash and now you only get $38,000, that is still a lot of money, but it’s a change” an advisor might feel,” said Tasnady. “Likewise, if you’re going from $20,000 to $19,000 a month, that big change is notable, too. No one wants to go down in monthly pay.”
Along with the drop in monthly cash pay in 2015, advisors may have concerns about what’s next as CEO James Gorman continues to find ways to improve corporate performance and boost the profit margin for wealth management at Morgan Stanley, which lags that of rival Bank of America-Merrill Lynch (BAC).
Morgan Stanley’s wealth operations had a pretax profit margin of 22% in Q3’14 vs. 24.7% at BofA-Merrill.
“They may wonder, is this a first step in a multiyear move to more deferred compensation?” Tasnady added. “The fear of advisors is not only about the change made for the next year but is about the message it sends. Is there going to be a boost in deferred compensation every year? Or is this a onetime adjustment?”
For advisors on set budgets, for instance, the shift could make a big difference in their plans.
“If you need every dollar and are already thinking of leaving,” said Tasnady, this shift could affect an advisor’s decision to leave Morgan Stanley. “People look for the final straw.”
Diamond, though, sees the situation differently. “It’s not remarkable enough to impact attrition or recruiting,” the recruiter said. “It won’t be the difference in making an advisor leave or not join the firm.”
Still, she says, the industry dynamics make for interesting times. “There will continue to be a percentage of advisors interested in independence,” Diamond said. And although she doesn’t expect any mass movement out the door, “All big firms are vulnerable,” the recruiter said, as retention packages given to advisors several years ago become fully amortized.
Plus, when it comes to choices for wirehouse reps leaving their firms, “The horizons are expanding, and there are more versions of independence than ever before,” Diamond said. “We’ve seen a number of large teams go to some version of independence.”
These moves raise the attention of colleagues. “It’s a trend that is going to continue,” she said, “but in terms of quantity, it doesn’t mean we’ll see a stampede.”
— Check out Understanding Advisor Economics 101: Follow the Money on ThinkAdvisor.