Wells Fargo & Co. is sweetening its signing bonuses for veteran brokers, a move to capitalize on Morgan Stanley's and Merrill Lynch's retreat from the industry's costly recruiting practice known as "prisoner exchange."
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The San Francisco bank's brokerage arm told industry recruiters this week it would raise its recruitment offers after The Wall Street Journal reported Morgan Stanley would significantly cut back on the pricey practice of poaching brokers, people familiar with the matter said.
"Attracting the industry's top talent will always be a priority for Wells Fargo Advisors," a spokeswoman for Wells Fargo said, adding that recruiting advisers and gaining their clients has "helped us grow in key markets."
Wells Fargo is betting on a vacuum left after its rivals' recent decisions to tamp down recruitment efforts, industry recruiters said, as the brokerage unit grapples with an exodus of brokers after its retail- banking scandal.
Wells Fargo's brokerage arm, known as Wells Fargo Advisors, has been losing brokers at a higher rate since the bank paid a $185 million settlement in September for opening up as many as 2.1 million accounts using fictitious or unauthorized information. At the end of September, Wells Fargo had 15,086 brokers, but its head count fell nearly 3%, or 429 brokers, through the first quarter of this year.
Over that same period, both Bank of America Corp.'s Merrill Lynch's and Morgan Stanley's head counts declined by half a percentage point, while UBS Group AG lost slightly more, with its total number of brokers falling 1.7%.
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For brokerage firms, recruiting is synonymous with growth. Brokers hired away from rivals usually bring as much as 80% of their clients and assets with them, giving the acquiring firm an immediate revenue boost. "Recruiting is instant magic," said Bill Willis, a Los Angeles-based brokerage recruiter.
Before last fall, deals had reached such lofty prices that they were sometimes money losers for firms, paying the industry's most sought-after brokers more than three times the fees and commissions they generated in the past year. However, in October, the Labor Department said certain incentives tied to those bonuses could run afoul of its fiduciary rule requiring brokers to act in the best interest of retirement savers, forcing brokerages to lower the overall size of its deals.
For brokers who generate several millions of dollars in fees and commissions, Wells Fargo is willing to offer a recruitment bonus of as much as three times the annual revenue they generate, with the bonus structured as a loan forgiven as the broker stays with the firm and hits certain targets, people familiar with the matter said. That is up from the roughly 2 1/2 times most brokerages were recently offering but still below the sky-high deals offered in the years following the financial crisis.
Executives often called recruiting a zero-sum game as brokerages would spend millions of dollars swapping brokers with one another, sometimes referring to it as a prisoner exchange. Still, brokerages weren't willing to pull back out of fear a rival would attract big-money teams, recruiters and analysts say.
That was until UBS last year changed its recruiting practices to extend offers only to teams of brokers managing hundreds of millions of dollars, if not billions. Merrill followed suit earlier this month, telling some executives they would pause all recruiting after June 1 as it works on a new incentive package aimed at the industry's biggest producers. Then Morgan Stanley followed with its own decision this week.
UBS, Merrill and Morgan Stanley are all looking to cut back on spending at a time when firms are spending tens of millions of dollars to comply with the Labor Department's fiduciary rule. Each of them have said they plan to redeploy money saved from recruiting into supporting their existing brokers, encouraging them to collect more assets and revenue.
Wells Fargo, however, has been in a different predicament since a less-than-successful 2015 recruiting deal with Credit Suisse Group AG, recruiters say. The firm had struck a deal at the time to recruit as many as 250 financial advisers from Credit Suisse's U.S. private bank in an effort to strengthen its standing with ultrawealthy clients.
But scores of brokers went on to pass on Wells Fargo's offer to join rival firms, with many choosing UBS. The number of moves caught Credit Suisse's attention and the Swiss bank filed an arbitration claim with Wall Street's self-regulator, the Financial Industry Regulatory Authority, later that year alleging UBS unfairly raided its U.S. private-banking business.
Wells Fargo ended up recruiting about half of those Credit Suisse brokers by mid-2016, while UBS, which didn't have any formal arrangement with Credit Suisse, added around 100, people familiar with the arrangement said at the time.
A spokesman for Wells Fargo said the firm got the Credit Suisse brokers it wanted "under the terms we wanted" through the deal.
"If Wells Fargo continues now, it has a great opportunity," said Michael King, a brokerage recruiter in New York, noting that Wells Fargo is intent on using their rivals' retreat from recruiting to bolster their presence among wealthy clients.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
May 25, 2017 16:51 ET (20:51 GMT)