The bear market has forced all brokerages to do some strategic rethinking. At Morgan Stanley, the exercise forced management to question a fundamental assumption of the merger of the giant investment bank with retail brokerage powerhouse Dean Witter in 1997. In the years following the merger, the firm aggressively recruited new brokers, putting Morgan Stanley up in the big leagues, in terms of feet on the Street.
Lately, however, management has been rethinking that plan. Now, it's focusing on quality, not quantity. Rather than continuing to pursue the mass of middle-market clients that Dean Witter had always targeted, Morgan Stanley has cut back the number of brokers and branches in its network and reoriented the remaining retail operation to focus on clients with $1 million to $10 million in assets — and to provide institutional-like service to those in the $10 million-plus range.
John Schaefer, the company's president of the individual investor group, and Bruce Alonso, director of investor advisory services, sat down with Registered Rep. Editor David A. Geracioti and Staff Writer Ross Tucker to discuss Morgan's future and the direction of the industry.
Rep.: Does the industry still have too many brokers?
Schaefer: Firms were working under a bull market model. The mentality was to assume that we were going to continue to grow. As a result, we got ourselves pretty far out there. At the merger, we had 9,000 brokers. Our raison d'être was to catch Merrill, in terms of financial advisors. At one point, we had more advisors than Merrill in the U.S. At the peak, we were over-brokered as an industry. We cleaned house to send a message. Now, having said that, everyone is trying to hold on to brokers. You're seeing the best people you've ever seen who are looking for work.
Rep.: How has the traditional brokerage model changed in recent years?
Schaefer: In the past, firms like ours have best been characterized as product-push cultures. That model is not going to be the model of the future. We're organizing ourselves around financial planning. If we come up with solutions for the client, it will result in the sale of product.
Rep.: What changes have you made?
Alonso: We completely revamped our training program for new hires and current FAs. It has changed from being primarily a program about product education to a way of teaching the process of identifying clients and providing solutions.
Rep.: You've also put a lot of effort into database products for advisors, right?
Alonso: Yes, The more data we can give the FAs, the more efficient they can be about using their time. All an FA has is time. That is the only thing he has to leverage.
Rep.: Is the shift towards fee-based business the ultimate model for the kind of clients you are targeting?
Alonso: There isn't a one-size-fits-all model. Fee-based business gets you part of the way there, but it doesn't address full profitability. In the past year, we've built an amazing menu of products and services to appeal to affluent clients.
Rep.: How much of your business is fee based? Will fee-based dominate?
Schaefer: Actually no. Not all clients want to be fee-based. We start with the premise that you should offer clients the choice of how to pay. We're in the 20-percent range. We want to be 100 percent fee-based, but it's unrealistic to believe you're going to get there. We're seeing movement every year. Is there a correct number? I don't know. We value allowing our reps to have there own business models.
Rep.: Still, the way advisors get paid is changing — where is the industry heading?
Schaefer: I think in the coming years you're going to see advisors getting paid based on the profitability of the relationship.
Rep.: How are you tweaking your pay structure?
Schaefer: Like everyone else, we pay more for fee-based and more for assets that have a recurring nature to them. Outside the U.S., we pay salary plus bonuses. We don't pay rep commissions, like we do here.
But when you get into a very high-end business, the private banking client, those with $10 million and up, we pay more like investment banking, a salary plus bonus. That's because high-net-worth is more like investment banking. And everyone on the institutional side is paid salary plus bonus.
Rep.: Is this getting away from a payout based on gross production?
Schaefer: It's only in the high end that [compensation plans] line up totally with banking. The products are more sophisticated. But I think that's a long way off. I was an investment banker for 25 years. We paid salary plus bonus but we used very objective standards. You can have a salary-bonus system, with the majority of the pay still based on commission. You just don't get the commissions as you go. I think longer term, you'll pay a percentage of business, but you might want to change it from just revenues to saying what's the profitability of the relationship, rather than say: “We're going to pay you salary and bonus.” The challenge is, how do you keep that sales culture, and not have it just be a product sales culture?