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Will Raising Hurdles for Broker Fees Help Morgan Stanley?

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As part of its cost cutting strategy, Morgan Stanley (MS - Free Report) will increase hurdles for its compensation grid (a scale used to determine the fees of brokers depending upon the revenue they generate) by 10% starting Jan 2017.

This is likely to provide incentives to the brokers to work harder in order to remain within the same pay bracket as earlier.

The total number of hurdles within the grid is expected to remain the same at 16, ranging from 28% to 55.5%. However, brokers will now need to produce 10% extra revenue in 2017 in order to qualify for the same paycheck as 2016.

As an example, a broker who produced $220,000 in revenues in 2016 would earn 32% of that amount as compensation. However, in order to stay within the same 32% fee bracket in 2017, the broker will now need to generate atleast $242,000 in revenues, starting from January. Similarly, in order to stay within the 49–53% bracket, brokers will now need to produce atleast $3.3 million in revenues, compared with $3 million, which they earlier did.

According to the company, majority of its brokers will not see any significant change in their pay next year. However, some of its brokers who fall on the edge of the grid will have to work harder in order to produce extra revenues to stay within their pay brackets.

Morgan Stanley will not make any alterations for brokers who fall within the 51.5–55.5% bracket, which is the highest in the grid. For them, the amount of revenue to be produced remains the same at $5 million or more and their compensation is based on their length of service with the firm.

This entire initiative is part of the company’s broader cost reduction program, which aims to reach profitability targets, mainly in its wealth-management division.

Notably, earlier in 2016, James Gorman, the chief executive had started an initiative called “Project Streamline” which was focused at reducing approximately $1 billion in costs across the entire bank.

Along with Morgan Stanley, UBS Group AG (UBS - Free Report) is also planning to make some changes in its broker compensation structure in 2017.

In fact, Merrill Lynch, a division of Bank of America Corporation (BAC - Free Report) has already initiated a change in its compensation grid this year.

We remain encouraged by Morgan Stanley’s expense saving initiatives so far. Also, its efforts to offload its non-core assets to lower balance-sheet risks and shift focus toward less capital-incentive businesses should lead to further improvement in profitability.

These initiatives along with its underlying strength have helped the stock gain approximately 32.3% year to date. Moreover, the stock has significantly outperformed the 19.2% gain witnessed by the Zacks categorized Investment Brokers industry over the same time frame.



Currently, Morgan Stanley carries a Zacks Rank #2 (Buy).  You can see the complete list of today’s Zacks #1 Rank (Stong Buy) stocks here.

Another stock worth considering in the same space, which sports a Zacks Rank #1, is Stifel Financial Corp. (SF - Free Report) . It has witnessed an upward estimate revision of 4.5% for the current year, over the past 30 days and its share price is up 18.6% year to date.

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