Morgan Stanley gives brokers incentive to find clients' outside money

Jed Horowitz
Thursday, 5 Dec 2013 | 2:28 PM ET

* Plan offers temporary credit for uncovering hidden assets

* Plan hikes pay targets for lower-producing brokers

* Brokers who control "managed" investments face fees

NEW YORK, Dec 5 (Reuters) - Morgan Stanley is offering its brokers an unusual pay incentive over the next two years to convince certain clients to disclose assets held outside the firm, according to the firm's 2014 compensation plan unveiled this week.

Like other banks, Morgan Stanley, the world's biggest brokerage with about 16,000 financial advisers, strives to consolidate as many client assets as it can at the firm. But clients are often reluctant to put all their eggs into one financial-firm basket.

To encourage brokers to win more assets from existing clients -- and to address broker complaints that the firm does not pay them for working with smaller accounts -- Morgan Stanley has tinkered with an unusual aspect of its 2014 pay plan.

It is lifting its ban on paying brokers for servicing households that keep less than $100,000 at the firm if those clients list their outside assets in a Morgan Stanley investment monitoring website called OneView, available to brokers and their clients.

"As an enhancement for 2014, small households with combined Morgan Stanley and OneView assets of $250,000 or greater will be exempted from the Small Household policy for up to two years, allowing advisers time to bring additional assets to the firm and gain better visibility to clients' investments," says a section of the 2014 compensation plan read to Reuters by brokers and firm officials.

Morgan Stanley, which gives reduced payouts to experienced brokers who generate less than $300,000 in fees and commissions, says many brokers complained that the small-household restrictions cut them off from clients who have growth potential. Brokerage firms typically pay their brokers a sliding-scale percentage of the revenue they produce, with the payout percentage rising as revenue hits higher levels.


The tweak to the "small household" stricture is one of several at-the-margin compensation changes that Morgan Stanley and other brokerage firms are making for 2014 to modify the behavior of brokers.

"They are figuring out how to make a little bit more money in the aggregate without angering any one person enough to get them to leave," said Danny Sarch, a White Plains, New York-based recruiter of retail stockbrokers.

Merrill Lynch on Tuesday upped the bonus potential for brokers who collect trust assets from wealthy clients, a priority of its parent Bank of America.

Morgan Stanley sources said it also has added some carrots to its latest compensation plan.

The most significant allows more advisers to qualify for an asset "growth" award that last year was available only to the top 40 percent of brokers as measured by the revenue they generate.

The award, which ranges from $20,000 to $300,000 based on levels of production and experience, will also apply to any broker whose revenue from client fees and commissions beats their 2013 total by $300,000.

Other changes in Morgan Stanley's 2014 pay scheme include:

* Higher revenue targets for lower-tier brokers. Those who produce less than $2.5 million of revenue will have to increase their output by 10 percent to get the same payout as in 2013. For example, brokers who formerly collected 38 percent of revenue that ranged from $350,000 to $400,000 will next year have to hit $385,000 to get that percentage. They will not hit the next 41 percent level until their revenue reaches $440,000.

Brokers with nine or more years of experience who bring in less than $300,000 continue to get only a 20 percent payout. The firm has 10 different percentage payout levels, ranging from 28 percent to 47 percent for stars who produce $5 million or more.

UBS AG's UBS Wealth Management Americas this week similarly tweaked its 2014 broker pay plan by increasing some production targets.

* Bonuses for making loans. Brokers can earn up to $202,500 for increasing the total mortgage, portfolio lines of credit and other loans in 2014, up from $127,500 this year, in line with the firm's drive to sell more banking products that keep clients loyal to the company.

* A surcharge on managed accounts. Brokers whose clients give them discretion to make changes in their portfolios, a growing trend at Morgan Stanley and its competitors, will be taxed 0.05 percent of the assets they bring into the fee-based accounts. The "investment services fee," for access to the firm's managed account products, is effective on Jan. 1, 2014, and applies only to new accounts.

The fee is capped at $15,000 a year and is meant to align the discretionary account program with fees charged brokers when they use packages of mutual funds, hedge funds or other money-management offerings that the firm has on its shelf.

Morgan Stanley told brokers it wants them to be agnostic about which managed account "platform" they use, picking what is best for clients rather than the ones that are most lucrative for the broker. Like most firms seeking to replace traditional commission-based accounts with asset-based fee accounts, Morgan Stanley allows its brokers wide leeway in negotiating the fees they charge.

Some advisers said the investment services fee aims to steer brokers away from discretionary accounts to firm-controlled portfolios so as to limit litigation and regulatory costs for improper investment choices. Others were skeptical that the fee docked from their pay will benefit customers.

"It's pretty clear that we'll simply take it into account when we negotiate their fees," said one broker.

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