Morgan Stanley confirmed its plans to cut back on its broker trainee program and, separately, cut underperforming brokers, probably about 10 percent of the force, a story that Registered Rep. broke on Tuesday.
In an internal memo distributed Thursday, co-president Zoe Cruz announced the company would reduce the number of trainees it hires to 1,000 in 2006, from 2,400 this year, while continuing to recruit experienced brokers who focus on high-net-worth clients. The memo also said Morgan would fire approximately 1,000 brokers it deems as underperformers, but it did not define underperformance. As of May 31, Morgan’s retail brokerage, also called the Individual Investor Group (IIG), had 10,438 registered reps.
In addition, Cruz noted in the memo that Ray Harris, IIG’s No. 2 executive, will run the unit until a permanent replacement for John Schaefer is found, as the search could last into next year. Registered Rep. recently floated Harris as a potential successor to Schaefer, among other possibilities.
“These measures will allow us to continue advancing toward our objectives of improving margins and profitability, even as we look for a new leader for IIG who can help take a valuable business to the next level of success,” Cruz wrote.
Morgan’s retail brokerage has recently come under fire for underperformance. The unit lags other Wall Street brokerages in overall profitability and broker productivity. IIG had profit margins of 12 percent in the first half of this year, versus 21 percent at Smith Barney, 19 percent at Merrill Lynch and 15 percent at UBS Wealth Management, according to Merrill Lynch research.
Meanwhile, 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 have attributed the production figures to the large number of trainees the firm employs. Whereas Morgan has been training around 2,400 reps this year, most of its rivals tend to train around 500 to 1,000 a year.
Cruz emphasized that Morgan Stanley is committed to keeping the retail brokerage at the firm and that the measures being taken reflect conversations with and suggestions provided by a number of branch managers and brokers at the firm.
“As John said when he visited IIG employees in Westchester three weeks ago, we are strongly committed to this business. It is a tremendous asset with many key and productive FAs, and we are intent on investing in it—but in a way that focuses on improved performance,” Cruz wrote.
“We are excited about the potential of the retail business and look forward to working together with our IIG employees in order to raise its operating leverage.”