snaaor4 Financial Planing: Morgan Stanley Sweotons Bonus for Recruits [> yew eel Download 9 fromDOCtoPOF FINANCIAL PLANNING March 1, 2005 Morgan Stanley Sweetens Bonus for Recruits By Tony Chapelle While Morgan Stanley's chairman has been fending off shareholders who want him to sell several lagging subsidiaries, the financial services giant has attempted to strengthen the performance of its retail brokerage arm by tweaking its recruiting package again, Speaking recently before the Citigroup Financial Services Conference, Philip J. Purcell left open the door to selling the Discover credit card business that he brought with him from Dean Witter Discover & Co. But Purcell indicated that he thinks the brokerage unit should show reasonable profits within the next two years. "We are more competitive in getting investment banking deals because we have retail,” Purcell said. ‘One way that Morgan Stanley wants to grow its retail brokerage business is by wading into the market for good, experienced brokers. In January, the company matched a recruiting deal being offered by rival UBS Financial Services. The most striking aspect of the new offer is that a broker theoretically has unlimited upside potential for his first and second years at Morgan Stanley. During those two years, the recruited broker can earn bonuses equivalent to the revenues he generates above his incoming production levels, Morgan Stanley is “offering a bonus of 100% of a broker's growth from when he joined. But if he stays level after the look-back period, he won't get anything," said Carri Degenhardt, a broker headhunter with Degenhardt Consulting in Jersey City, Nu The new package includes the same upfront bonus the company has been offering for at least a year: a 100% bonus awarded in two parts--a forgivable cash loan equivalent to as much as 75% of a rep’s trailing-12-month revenues, and restricted stock equal to as much as 25% of the last year's revenues. But then there's the additional incentive: After the broker's first 14 months with the firm, he gets to pull out his best 12 months of production--and he gets a 100% bonus on any amount that exceeds the production level he entered Morgan Stanley with. For instance, let's say a rep generates hpiticonse icopyight neVuserNienFresUse act TeSNDU2NDU%ID 18sive Financial Ptaming: Morgan Stanley Sweetens Bonus fo Recrus $1.2 million a year before coming to Morgan Stanley. Then he makes $1.6 million during a 12-month period within his first 14 months at the firm. He would qualify for a 100% bonus on the $400,000 over the $1.2 million. A second bonus can be earned between his fifteenth and twenty-sixth month based on that year. All the new, back-end bonuses are payable in six or seven years with Morgan Stanley stock. However, if the rep leaves the firm before the bonus vests, the money is forfeited This new package unveiled in January comes on the heels of another policy. Only last fall, the company began using a recruiting package worth up to 135% of a rep's production when alll front-end and back-end incentives were included: an upfront cash bonus equivalent to 75% of the person's trailing-12-month commissions, and 30% in deferred stock upfront. In addition, there were two back-end bonuses each equivalent to 15% of the person's gross commissions after 14 and 26 months with the firm Wall Street learned the hard way how necessary it is to offer back-end incentives in addition to front-end ones: Firms offered hundreds of millions of dollars to lure brokers during the internet bubble only to find that many reps couldn't keep up their numbers once the bubble burst. In 2002, UBS was the first wirehouse to recruit using back-end bonuses, Brokers transferring to UBS could earn an unlimited amount of money if they increased their revenues within the first two years. If their production levels declined, however, the brokers didn't qualify for back-end Payments. Other firms that have followed this results-driven model with various modifications. Retention remains a concem at every brokerage. "Firms are growing a litle tired of brokers coming over, staying with them for a while, and then doing it all over again," says Erick Maronak, the chief investment officer and director of research at Victory NewBridge Investment Professionals, an institutional asset management company. "The longer a broker with a profitable book stays with the firm, the more profitable itis for the firm, The formula goes out the window if the guy is gone in two or three years.” From a broker's point of view, however, the quicker a contract expires, the better, ‘At Morgan Stanley, the base contract is five years, and a rep signs a new contract each time he takes the 14-month or the 26-month bonus, effectively restarting the clock on a new five-year contract. Only Merrill's base five-year contract is shorter than Morgan Stanley's new deal, Degenhardt says, adding that UBS has a seven-year deal that can shoot up to ten years based on added bonuses and the amount of deferred compensation the broker can arrange with a branch manager. Other wirehouses and RBC Dain Rauscher also require brokers to sign transition contracts of seven years or longer. “Ithink it's a good program for both sides," Degenhardt says of the Morgan Stanley deal. “I've witnessed too many brokers who are now engaged in 15-year deals because they took bonuses of 150% upfront, and now all of a sudden they can’t go anywhere. This is a viable option for any broker who does not want to be a slave to any particular firm for 15 years, or be working the rest of his life for the IRS." However, to qualify for the recruiting bonus, new hires must have at least $400,000 in annual production, Degenhardt says. A Morgan Stanley spokeswoman refused official comment, but in 2003, the average production for existing Morgan Stanley reps reportedly was $450,000. By comparison, the average broker at Merrill Lynch generates $711,000, according to James Gorman, president of Merrill's Global Private Client Group. At Smith Barney, that figure stands at $535,000, says Citigroup Chief Financial Officer Sallie Krawcheck, That disparity may be one reason Morgan Stanley apparently feels the need to grab top producers. The new Morgan Stanley recruiting deal was rolled out just days ahead of the speech given by Purcell in which he told a roomful of institutional hipaiconse eopyigh neUuserhenreeUse.acud=MTeSNDU2NDUYIO 2snaaor4 Financial Planing: Morgan Stanley Sweotons Bonus for Recruits investors that he has no plans to sell the 11,000-broker Individual Investor Group retail unit, despite the fact that the unit's profits consistently lag behind those of Merrill and Smith Barney In 2004, Morgan Stanley's retail unit--which includes financial planning and wealth management--generated pre-tax profits of just 8% compared with 22% at Citigroup's Smith Barney and 19% at Merrill. Investors and analysts complain the retail brokerage unit is dragging down the share value of the parent company. Last year, Morgan Stanley was the only investment bank/brokerage to see its stock price fall-down 4.1% in contrast to the 7% increase for stocks on the Dow Jones Investment Services Index. Over the past five years, Morgan Stanley has lost 24% on its share price compared with a gain of 37% at Merrill and 10% at Goldman Sachs Group. Morgan Stanley shareholders such as Scott Sipprelle, chairman of hedge fund Copper Arch Capital, are calling for Purcell to sell the retail brokerage unit and other money-losing divisions. In 1997, Morgan Stanley & Co., then a profitable investment bank, merged with Dean Witter Discover & Co., which included the retail brokerage and the Discover credit card subsidiary. Ina strongly worded letter to the board of directors, Sipprelle said Morgan Stanley should sell or spin off its retail brokerage, asset management division, and the Discover credit card business. "Should there be no constructive steps made," his letter said, "we intend to oppose strongly the re-election of each of the Directors." Four of Morgan Stanley's ten directors face re-election this year, although Purcell is not one of them. The company's annual meeting is March 15 in Riverwood, Il For his part, Purcell is maintaining that a brokerage unit is vital to his investment bank, While he said that he would consider selling the Discover card business in two or three years if it continues to disappoint, he added that Morgan Stanley brokers can better use the Discover card and other products to land and keep rich clients. ‘A Morgan Stanley spokeswoman declined to explain why the firm is increasing recruiting bonuses again, She also wouldn't comment on whether the company is meeting its hiring goals for reps. SOURCEMEDIA® ©2014 Financial Panning and SourceMedia, Inc. Allrights reserved... Permission granted for up o 2 copies. All rights reserved, 'You may forw ard ths article or get additional permissions by typing he tp: //1ice 3.74232. Financial Panning logos are registered trademarks of Source Media . 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