Morgan Stanley (NYSE:MS) and Bank of American Corp (NYSE:BAC) are looking to boost their margins by reducing recruitment and retention bonuses that became commonplace in the aftermath of the 2008 crisis. Morgan Stanley CEO James Gorman said that he expects to see brokers switch firms less often, and the head of BAC-owned Merrill Lynch, John Thiel, said that retention bonuses set to expire in two years will not be renewed, reports Zeke Faux for Bloomberg.
Morgan Stanley payment for compensation
It has become standard practice to pay high performing brokers a year’s salary to switch companies, to make up for lost bonuses and retention fees that are meant to prevent them from doing so, but the impact on the wealth management sector has been a “tax on the industry” according to Gorman. Morgan Stanley (NYSE:MS) paid 57% of its revenue in compensation this quarter, which is down from 63% during the third quarter of last year, but still an incredible dent in profits.
“That level of turnover has dropped significantly and we expect it to continue to drop,” said Gorman during this quarter’s earnings call. “So that reduces your overall compensation costs, because obviously recruiting deals can be very expensive.”
Bank of America’s retention bonus
Bank of American Corp (NYSE:BAC) has been on the hook for retention bonuses given to 6,000 brokers to keep them on board when the bank took over Merrill Lynch, with the caveat that they would lose the bonuses if they left within seven years. With two years left in the deal, Bank of American Corp isn’t convinced that the retention bonuses have really worked, making them an unnecessary expense for the brokers who would have stuck around anyway.
Merrill Lynch lost the fewest financial advisers to competitors in the third quarter since the end of 2010, according to Susan McCabe, a spokeswoman. She declined to give the number.
“Every firm has experienced turnover in the last three or four years with people who had a retention package, so my question is, did it really work?” asks Thiel.
According to Danny Sarch, president of the recruitment firm Leitner Sarch Consultants Ltd, the problem is that banks aren’t able to train enough brokers to meet demand, and all this talk about reducing bonuses is just wishful thinking. Until they find a way to bring effective financial advisors up through the ranks in sufficient numbers, he expects that the war for talent will continue.