Morgan Stanley will curtail its recruiting of veteran brokers, signaling that Wall Street is no longer willing to gorge on the pricey practice of paying top-dollar to poach talent.
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The New York firm told brokerage managers on Tuesday that it would "significantly reduce experienced adviser recruiting" in an effort to tamp down those costs, while spending more on supporting existing brokers and investments in new technology, according to a memo from wealth-management heads Shelley O'Connor and Andy Saperstein that was viewed by The Wall Street Journal.
Morgan Stanley is the latest brokerage to say it wants to cut back its recruitment activities, which usually involved paying brokers six- or seven-figure signing bonuses, Wall Street's main mechanism of attracting brokers, assets and revenue.
Such bonuses were structured as loans forgiven over as long as eight or nine years, with brokers initially getting paid up to 150% of the annual revenue they generated off fees and commissions. Such deals usually included back-end portions that brokers would earn after hitting certain asset and revenue targets over the life of the deal -- an arrangement that had become problematic under new retirement rules set to take effect next month since they could be perceived as a conflict of interest. Brokers who changed firms before the deal's term ended were usually forced to pay back a remaining portion.
Executives had bemoaned the practice for years as costly and called it a "zero-sum game" among the four main brokerages -- Merrill Lynch, Morgan Stanley, UBS Group AG and Wells Fargo & Co. -- as they routinely traded brokers with one another. Still, brokerage executives viewed it as a necessary pipeline for asset and revenue growth.
The problem, recruiters say, is that brokerages were hesitant to pull back from recruiting if their rivals wouldn't. That was until UBS Group said last year that it would reduce by 40% the number of brokers it recruited annually.
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Following UBS's lead, Merrill earlier this month told some executives that it would pause all recruiting after June 1 as it developed a new incentive package aimed at courting the industry's most valuable free agents, the Journal previously reported.
Morgan Stanley will continue to honor recruitment agreements it has with brokers through June 16 and have a start date no later than Sept. 1, according to the memo to managers. In the meantime, Morgan Stanley is developing new recruiting policies that will be revealed in the coming weeks, the memo added.
The money Morgan Stanley saves from its recruiting pullback will be funneled into a series of investments aimed at encouraging the firm's roughly 15,700 brokers to attract more client assets and revenue, similar to changes made in the wake of decisions by UBS and Merrill. That includes hiring hundreds of tech-savvy employees known as digital adviser associates who will help train Morgan Stanley's brokers on new digital tools, including a robo adviser that will be rolled out later this year to help brokers attract and keep younger clients, according to people familiar with the matter.
Still, even though brokerages have gained the confidence to pause their recruitment activities, those decisions may not last long, recruiters say, especially as firms such as Raymond James Financial Inc., the U.S. brokerage arm of the Royal Bank of Canada and Edward Jones continue to aggressively hire brokers from rivals.
"Firms start to coast when they stop recruiting," said Rick Peterson, president of a brokerage recruiting firm that bears his name. "Six or eight months later sometimes, there's a manager's meeting and leadership gets input from the field that scares them. Then they say it's time to get back out into hiring mode again."
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
May 23, 2017 14:28 ET (18:28 GMT)