Bloomberg News

Morgan Stanley Smith Barney Said to Change Broker Pay Structure

October 25, 2011

Oct. 25 (Bloomberg) -- Morgan Stanley Smith Barney, the world’s largest brokerage, plans to adjust its compensation structure to boost profitability, according to a person familiar with the discussions.

The new pay policies are set to go into effect in 2012, said the person, who declined to be identified because compensation decisions aren’t public. The New York-based firm is raising the minimum amount of revenue a broker must generate to avoid pay cuts to $300,000 from $250,000, the person said.

The plan includes bonuses aimed at giving financial advisers more incentives to bring in new clients and increase lending to customers. The changes may bring down the division’s compensation ratio as President Greg Fleming seeks to achieve Chief Executive Officer James Gorman’s goal of a pretax profit margin of more than 20 percent at the unit.

“Greg Fleming is very focused on expense discipline, expense management,” Morgan Stanley Chief Financial Officer Ruth Porat said on a conference call last week. “What he’s focused on is reducing the lower productivity FAs and that brings with it some incremental cost savings as well.”

Compensation costs amounted to 62 percent of the global wealth management division’s net revenue in the first nine months of the year, down from 63 percent in the same period of 2010.

Brokers who produce less than $300,000 will receive a payout of 20 percent of that revenue, instead of 32 percent or 34 percent, the person said. The average annualized revenue per adviser in the third quarter was $747,000. The firm is also changing the makeup and vesting schedule of bonuses for employees who have been with the firm a minimum of five years.

Reuters reported the pay changes earlier today.

Advisers’ Bonuses

Financial advisers’ bonuses based on revenue production will be reduced by 1 percentage point across the board, the person said. Brokers can earn as much as $442,500 under new bonuses that pay as much as 0.40 percentage point on new client assets and 0.50 percentage point on new mortgages and other loans sold to customers, according to the person.

Morgan Stanley bought a controlling interest in the joint venture two years ago and has the option to buy the business outright from Citigroup Inc. over the next three years. The division, which Fleming took over in January, had 17,291 advisers and $1.56 trillion in client assets as of Sept. 30.

The brokerage will operate with a “mid-teens” pretax margin by the first half of 2013 “irrespective of the market,” Fleming, 48, said today in an interview on Bloomberg Television with Erik Schatzker. Rising equity markets and higher interest rates may push the margin to 20 percent, he said.

--With assistance from Erik Schatzker in New York. Editors: Steve Dickson, William Ahearn

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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