Competition in Greg Fleming’s Global Wealth Management unit at Morgan Stanley just got cutthroat.
According to an article in Reuters, the unit is revamping the bonus system so that anyone who wants a bonus of up to 34% of the commissions and fees generated will need to hit a certain threshold — and they better not generate less than $300,000 per year. If they do, they’ll get put in the “penalty box” and only receive 20% of their generated profits.
Everyone should have known this was coming at least since last week, after Gorman announced that his goal for Fleming’s unit was a pretax profit margin of 20%.
Global wealth management, overseen by Greg Fleming, posted pretax income of $362 million, up from $281 million in the third quarter of 2010. It also had $15.5 billion in net new assets. The division’s pretax profit margin rose to 11 per cent from 10 per cent in the first half. Gorman has said the unit should eventually post a pretax profit margin of more than 20 per cent.
20 per cent is a big jump up from the unit’s pre-tax profit margin of 11% in the third quarter (when trading volumes were pretty fantastic) and 10% in the quarter before (when trading volumes were not so great).
So broker-broker competition just got cutthroat. The good news is that brokers could wind up getting paid more, as the Reuters article makes it clear that the firm is willing to allocate a larger portion of the firm’s quarterly expenses to broker compensation. Of course, they’re also leaving the option open to allocate less. It all depends on how much the brokers produce.
A key aspect of the new bonus system is that brokers produce on their own. There’s a big bonus cut in “selling concessions,” bonuses for brokers who sell shares created through initial public offerings, secondaries and block trades. Those bonuses will now be 20% less because they were produced by Morgan Stanley, and not the broker, in Morgan Stanley’s opinion.
Here’s how the old system compares with the new system:
Old system: brokers need to generate $250,000 a year in fees and commissions in order to get payouts as high as 34% of that generated. Anyone who gets lower than that gets only a 20% payout
New system: brokers with nine years of service who produce less than $300,000 a year will have their payouts slashed to 20%
Old system: Brokers get bonuses for hitting certain revenue targets. Brokers who generated $5 million in income received 7.5%, for example. And someone who generated $750,000 got 3.5%.
New system: Brokers get 1% point less of a bonus (it is paid in cash and stock that vests in 8 years).
Old system: “Restricts access to IPO shares to brokers who produce at least $500,000 in annual revenue, which means few brokers will compete for shares.”
New system: Up to a $315,000 cash prize for attracting net new assets.
New system: Up to a $127,500 cash prize for selling more mortgages, securities based loans and managed accounts.
New system: A broker who brings in more than $7.5 million in balances can receive 0.40% of the loan totals as a bonus.
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