By Joseph A. Giannone
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Executives of Morgan Stanley Smith Barney, a joint venture with Citigroup Inc. <C.N> briefed managers Friday on the plan, which also will slash pay for lower producers. Financial advisers are getting briefed on the plan this week, recruiters said.
A person familiar with the new plan gave details, but was not authorized to discuss compensation matters in public.
The extent to which these changes cut or boost compensation costs will depend on the numbers of brokers who offset decreases in some areas with new incentives, recruiters said.
Head of the brokerage firm's 51-percent owner, Morgan Stanley <MS.N> Chief Executive James Gorman, "seems to be dead set on hitting a 20 percent profit margin, and they're not going to be able to do that without messing with compensation," said recruiter Ron Edde of Armstrong Financial Group in Carlsbad, California.
Morgan Stanley Smith Barney's strategy marks a shift toward boosting profitably rather than just adding new brokers to increase revenue. Gorman hopes to lift overall profit from the 11 percent of the third quarter to 20 percent, and that will involve a combination of pay and operation expense reductions.
Trying to reach that goal, brokers with nine years of service who produce less than $300,000 a year will have their payouts slashed to 20 percent from as high as 34 percent.
Under the current system, brokers need to generate $250,000 a year in fees and commissions to avoid the 20 percent payout.
Financial advisers below the 2012 threshold, but who oversee at least $60 million in assets, can avoid the penalty box -- industry jargon for lower payouts for weak performance -- by joining a team of brokers.
The largest U.S. brokerage, with $1.56 trillion in assets and 17,291 advisers, Morgan Stanley Smith Barney is also changing the way it pays "length of service" bonuses.
The person familiar with the plan said these awards next year will be paid 25 percent in Morgan Stanley stock, which vests in four years, and 75 percent of cash, which vests in eight years.
Under the current plan, half is paid in cash the following year, while the rest is split evenly between stock and cash and paid after eight years.
A third change will reduce the bonuses paid for hitting certain revenue targets by 1 percentage point and effects all brokers. These awards, paid out in cash and stock, vest after eight years.
Brokers who generated $5 million in income and used to receive 7.5 percent now will receive 6.5 percent, for example, while someone producing $750,000 will see their revenue bonus reduced to 2.5 percent from 3.5 percent.
Offsetting these sticks are a few carrots.
Advisers can now receive up to $315,000 in cash for attracting net new assets, and up to $127,500 cash for selling more mortgages, securities based loans and tailored financing for the rich.
A broker who brings in more than $7.5 million in balances can receive 0.40 percent of the loan totals as a bonus.
Morgan Stanley also slashed selling concessions for brokers who sell shares created through initial public offerings, secondaries and block trades by 20 percent.
The firm is justifying the reduction by telling advisers that these IPO shares are created by Morgan Stanley and made available to brokers, recruiters said.
Morgan Stanley also will restrict access to IPO shares to brokers who produce at least $500,000 in annual revenue, which means few brokers will compete for shares. Actual allocations are based on complex formula that factors broker performance and the track record of clients.
(Reporting by Joseph A. Giannone; Editing by Richard Satran; Additional reporting by Lauren LaCapra, Jessica Toonkel and Ashley Lau)