Morgan Stanley wants to pay out a smaller portion of wealth management revenue to the retail brokers who generate it, the final and perhaps most difficult front in Chief Executive James Gorman's drive to reduce staff costs across the bank.
For now, executives are considering changes at the margins: cutting pay for brokers who generate the least revenue for Morgan Stanley Wealth Management, and slashing the money it sets aside to lure experienced new hires. Executives have been hashing out possibilities for the 2015 broker pay plan in recent weeks, but have not made any final decisions.
"There are some functions you don't need to continue to put money into as the revenue line grows, as we become bigger, as we are more selective on recruiting and we have less attrition," Greg Fleming, president of Morgan Stanley Wealth Management, said in an interview last month.
Reducing pay in the brokerage business is tough to do, because even mid-grade advisers are still in high demand and can easily leave for other banks, or strike out on their own, often taking some prize clients with them. Demand for talent is slacker in other businesses like trading.
Many customers are fiercely loyal to their financial advisers. That is particularly the case if they credit the advisers with helping to make them wealthy.
Clients share personal information during marriages, divorces and family emergencies, and advisers can become almost like personal concierges to top clients - offering access to hot investments, coming up with loans for medical procedures, or wining and dining them at celebrity cocktail parties and sporting events.
Executives at Morgan Stanley are trying to ensure they incentivize the brokers to do the right thing for customers and the firm. The bank is hoping to reduce the commissions brokers get to simply buy and sell securities, and to instead encourage them to offer more holistic financial advice.
Gorman said at a conference last month that he wants to pay 55 percent or less of wealth management revenue to brokers, 5 percentage points down from the current 60 percent. Fleming is responsible for hitting that target.
Reducing what is known as the "compensation ratio" by that much would save the firm $884 million in costs next year, based on a revenue projection from Bernstein Research - big savings for a bank with $28 billion in total annual costs.
Fleming told Reuters he can get there not by cutting pay, but by growing revenue through products like loans, and by being more careful not to spend too much on bonuses for new advisers. Recruiting has become a substantial expense for big brokerages like Morgan Stanley in recent years, with multi-million-dollar sign-on bonuses routinely offered for advisers with large books of business.
The bonuses can be so large that they make an adviser an unprofitable bet, even when spreading the cost over the years he or she spends generating revenue.
"The recruiting costs are tremendous to bring experienced advisers over," said Robert Dicks, who heads Deloitte Consulting's Human Capital Financial Services practice in the U.S. "Lowering that and having more success in developing new advisers into the business is key to bringing down the compensation ratio."
In the longer run, some Morgan Stanley executives wonder if the bank will have to cut compensation expenses for its 16,426 advisers even more.
Although Gorman's wealth management target was the most aggressive cut to pay ratios in Morgan Stanley's three business units, the 55 percent ratio is still much higher than the 40 percent or less he outlined for institutional securities and investment management.
"Bank executives say, it's a high-cost, high-aggravation business and why can't we bring it under control?" said Alan Johnson, a Wall Street pay consultant, referring to the challenge of managing the personalities and pay packages of thousands of individual advisers. "They think about it every day - even just getting another 1 percent on billions of dollars' of revenue is a lot of money."
Privately, at least one Morgan Stanley executive said he believes the compensation ratio in wealth management should eventually fall far below the one Gorman outlined, although he acknowledged such a goal would be difficult to achieve unless the industry moved in lockstep to reduce pay all at once.
Plenty of industry veterans are skeptical banks will be able to cut broker pay at all, given the competitive hiring environment, and how important the business has become for earnings. Wealth management now produces more than 40 percent of Morgan Stanley's annual revenue, and about 60 percent of its pretax profit.
"It's not just tough, but impossible," said Mindy Diamond, a brokerage recruiter who runs Diamond Consultants in Chester, New Jersey. "I can tell you unequivocally that if they do anything to meaningfully mess with comp, they would lose a good majority of advisers. I just don't see it happening."