Morgan Stanley Squeezes Brokers on Compensation. Useful incentive or Recipe for Disaster?

  • On December 14, 2016

By Phil Ciano, Partner

Last week, Morgan Stanley announced broad pay cuts for its brokers, unless, according to the Wall Street Journal, the brokers “boost the fees and commissions they collect from retail investors.” According to the Journal, starting in January, 2017, Morgan Stanley is raising the bar for broker compensation “to incentivize [the brokers] to produce more revenue, . . . .” While on its face, the Morgan Stanley “incentive” program appears benign, it may have far-reaching implications as it pertains to potential investor loss claims.

It’s common in the financial services industry to pay brokers based on the amount of fees and commissions they generate in any given year. Obviously, the biggest producers enjoy the largest share of the “pie.” Again, according to the Journal, high performing broker-producers which normally aim for around 50% commission on revenue payouts, will now need to generate “at least $3.3 million in fees” in order to recoup the same 50% threshold. This benchmark is up 10% from the thresholds high-end brokers were required to hit to achieve the 50% commission payout in 2016. All of these compensation “incentives” are part of Morgan Stanley’s “Project Streamline” which is designed to cut $1 billion in annual costs to the firm.

Morgan’s Stanley’s announcement is similar to those changes enacted by Merrill Lynch (now part of Bank of America), who saw their base pay fall anywhere from 2% – 8% last year, unless they hit higher revenue hurdles. So, what does all this mean for the individual investor?

In dealing with brokers and financial advisors with integrity, the changes announced at Morgan Stanley (and other financial firms) should make no difference whatsoever. A good and honest will broker will remain a good and honest broker no matter what “incentive” compensation program he/she is operating under. However, for those brokers who play on the ethical fringes (both internally and externally), a firm policy that requires them to generate more commissions and, in turn, more revenue for the firm, could raise red flags for the individual investor.

A rogue broker – – faced with mounting pressures of a newly-instituted compensation program – – might be motivated to push retail investors into financial products which are unsuitable, inappropriate or outside of the investor’s objectives. When “generating commissions” take precedence over what’s best for the customer, disastrous results could happen. Obviously, these incentive programs are too early-stage to be able to tie any empirical data back to this warning, but it is something that individuals investors should absolutely be aware of as they turn the page to a very robust stock market in 2017.

For questions concerning negligent, fraudulent or other misconduct by your broker or irregularities in your investment accounts, contact Phil Ciano or Andy Goldwasser at 216-658-9900.