John Mack is moving quickly to get Morgan Stanley’s ailing retail brokerage in shape.
Just a week after the firm announced that retail head John Schaefer will be stepping down at year-end, widespread speculation has surfaced that Mack will freeze or cut back on new trainee hires, say recruiters and senior sources at the firm.
At the same time, Morgan is aggressively courting $2 million producers with rich pay packages to replenish its ranks. (Morgan declined to comment.)
Both moves would help remedy what critics cite as one of the retail unit’s biggest failings: on average, Morgan brokers seriously lag brokers at rival firms in terms of production. Average revenue per broker at Morgan Stanley was $472,121 for the first half of 2005, versus $545,844 at Smith Barney, $715,673 at Merrill Lynch and $723,490 at UBS, according to Merrill Lynch research.
Morgan executives attribute the production figures to the large number of low-producing trainees the firm employs. It’s widely believed that Morgan has the biggest training program on the Street, and the company said as recently as a month ago that it is planning to add 2,400 reps this year. The hiring goals at other wirehouses tend to be in the 500 to 1,000 range.
“It doesn’t surprise me that he would cut the training program,” says Danny Sarch, a recruiter with Leitner Sarch Consultants in White Plains, N.Y. “It’s a huge expense and the most obvious example of the Phil Purcell plan that didn’t work: you train thousands, tell them what to sell and they listen.”
The formula Morgan rode to retail success—pushing proprietary product through an in-house distribution channel—has fallen out of favor, and the trainee program currently in place no longer provides greenhorns with the skills to survive, Sarch says.
Recruiters speculated that a trainee moratorium might be part of Morgan’s effort to give itself the room it needs to overhaul the training program.
“A lot of firms have dropped those programs and then restarted them in the last five years,” notes Rich Schwarzkopf, a recruiter with Schwarzkopf Recruiting Services in New York.
Senior brokers at Morgan say they have never been very fond of the trainee program, and would welcome a cutback. “It would certainly be a benefit for all of us, including the trainees who are here now,” said one senior broker. It would cut costs, leave more resources for more senior brokers, and “give those of us who have been around a while time to actually help” the trainees, he said.
But to really increase broker productivity, Morgan also needs to lure some top talent to the firm. It doesn’t help that Morgan lost a net 500 brokers in the first half of the year—at least partly over turmoil surrounding former CEO Philip Purcell’s leadership.
So a few weeks ago, the company began offering $2 million producers 110 percent upfront, plus 20 percent at the end of 14 and 26 months for those who hit certain production levels, according to Rick Peterson, a Houston-based recruiter. Peterson estimates that about half of all Morgan Stanley brokers, including the 150 investment representatives that are in the original Morgan Stanley private wealth management division, produce $2 million or more today.
One senior broker in New York says he’s also heard rumors that Mack plans to cut 1,000 of the lowest producers at the firm in the next month and a half. “They want to do it this fiscal year, because there are going to be chargeoffs,” he said. He would have to pick and choose strategically because the firm would have a hard time closing offices—most of them have long-term leases, he says.
“Mack does not want to be a firm of 12,000 people; he wants to be a firm of 8,000 hardcore brokers,” Peterson adds. “That was the original intent of the [Dean Witter] merger, to increase the number of high-net-worth brokers.”