Morgan Stanley Cuts the "Nice But Not Necessary" and Adds to Wealth Management

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Morgan Stanley reports a bleak earnings picture, especially in fixed income sales and trading, and says it will trim headcount by another 800 employees, bringing the number of people let go since the end of 2011 to 4,000. In the conference call to analysts yesterday, available on Seeking Alpha, the bank revealed its plans for reductions in headcount and compensation as well as other strategies aimed at trimming expenses. Most units are shrinking, however wealth management is expected to grow, but at a slower rate than in the past.

Fixed income will take a hit

FICC sales and trading revenues fell by 70 percent to $770 million after a strong first quarter, so it’s not surprising that Morgan Stanley is looking at the structure of this division.

Ruth Porat, chief financial officer at the bank, said that certain fixed income employees were “nice to have, but they’re not necessary,” and that it would move “away from complex structured product businesses to high-velocity, flow-oriented products." In the areas where revenues were “most lumpy,” the bank was “being the most aggressive and will be increasingly so," she added. Specifically, structured credit and sub-prime securitization are areas where cuts seem likely.

Unless you’re in the front office, it’s unlikely that you’ll find work in New York or London

Morgan Stanley’s Office of Re-engineering was created in winter last year and its focus is on "optimizing" the business, namely stripping out costs where it can. Inevitably, this means focusing on reducing compensation expenses as well as job cuts.

However, it also involves shipping people out to lower cost locations. More people are likely to move out of New York to Morgan Stanley’s operational center in Baltimore.

Bonuses are shrinking, but performers will still be paid

Compensation is sliding at Morgan Stanley – by 36 percent, which is a far higher cut than its investment banking peers – and clawbacks could be on the cards. However, Porat indicated that they would still look to dig deep for those generating revenues: “The way we think about this is we want to drive returns, we want to ensure we can the pay people who are driving returns and we need to make sure that we’re doing all that we can to use those compensation dollars most efficiently,” she said.

This could simply be rhetoric to ensure there’s not a perception that Morgan Stanley isn’t falling behind its competitors on pay, but it also suggests that they’re primarily trying to cut costs in back office functions.

Wealth management will largely be spared, but it’s getting tougher to break in

Morgan Stanley has shied away from making deep cuts in its wealth management divisions. While it talks about “quality, rather than quantity” of financial advisors, the main focus has been on “raising the bar” to entry. The number of trainees it took on shrunk from the planned 2,000 to 1,250 this year, and the training programs have been restructured to try and increase productivity. In other words, fewer people are having to work harder.

As for its strategy of scooping up senior high producing wealth management teams, that seems to be continuing unabated. Reuters reports that Morgan Stanley Smith Barney had landed veteran wealth management teams that managed more than $4 billion assets at rival brokerages Merrill Lynch and UBS Wealth Management Americas in an effort to bolster its adviser force across the United States. In North Carolina, advisers James Harris and Pam Ashley joined Morgan Stanley Smith Barney's Charlotte office from Merrill Lynch.

Harris had been at the firm for more than four decades and managed more than $3 billion in client assets with Ashley, according to a source with knowledge of the move. They had an annual production of roughly $5 million.

In Texas, advisers Javier Vargas and Ramon Perez joined Morgan Stanley Smith Barney's Houston office from UBS Wealth Management Americas, the U.S. brokerage division of the Swiss bank. Vargas and Perez managed $300 million in client assets and generated roughly $3.6 million in revenue.

Morgan Stanley Smith Barney confirmed it had snared both teams joined but did not comment on the advisers' client assets or production levels.

Other recent wealth management hires include:

  • Arkansas-based Brent Henry, Dustin Colebank and Mike Hudson, who joined Morgan Stanley Smith Barney's Rogers, Ark. office from Merrill, where they managed $230 million in client assets. They generated more than $2.3 million in annual revenue last year.

  • From UBS, Florida-based advisers Sheldon Hechtman and Ellen Klersfeld joined Morgan Stanley Smith Barney's Boca Raton, Fla. office. They managed $211 million in client assets and generated $1.6 million in annual revenue last year.

  • In Minnesota, adviser Blane Hammer joined Morgan Stanley Smith Barney's Wayzata, Minn. office from UBS, where he managed $120 million in client assets and generated $1.3 million in revenue last year.

  • Morgan Stanley Smith Barney also said it had hired adviser Eliot Ross from Barclays in New York where he managed $98 million in client assets. Ross joined the firm's Park Central branch in Midtown Manhattan. He generated just over $1 million in annual revenue last year.

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