Wire-houses and banks
continue in their never-ending attempt to boost profits. Morgan Stanley
now is enticing their brokers to change how they operate by adjusting their compensation plan. By next April, Morgan Stanley brokers will be able to keep more of the money they generate for the firm by using new technology and hitting certain client acquisition targets. And, they can earn even more if they're able to convince clients to take on more debt and do more of their banking at Morgan Stanley.
The firm's retail lending portfolio, comprised largely of mortgages and portfolio-backed loans, has tripled in the past five years as Morgan Stanley sought to catch up with rivals such as Merrill Lynch, UBS Wealth Americas and Wells Fargo Advisors that are owned by banking giants. As part of its push to encourage more lending, the firm is near-doubling the reward for advisers who bring in more client debt. Executives said changes to Morgan Stanley's lending-growth award program would allow advisers to earn significantly more than in past years.
Since wealth lending has become more prominent on Wall Street, some are expressing concerns about risk. Will wealth managers overdo it, pitching risky debt onto unsuspecting clients who then get financially over their skis? Last year,
Morgan Stanley paid a $1 million fine to resolve a Massachusetts investigation into alleged high pressure sales contests to originate wealth loans. And with real estate, stocks, 20th century art, and other valuable assets at record prices, it's possible that a market pullback would effectively put a margin call on wealthy clients.
Household Debt Levels
With household debt levels reaching new highs, encouraging clients to add to their debt balances might not be good for anyone - other than the broker or their firm. The Center for Microeconomic Data's latest report on household debt revealed
that debt reached a new peak in the first quarter of 2018.
According to the report, aggregate household debt balances increased in the first quarter of 2018, for the fifteenth consecutive quarter, and are now $526 billion higher than the previous peak of $12.68 trillion (in the third quarter of 2008). As of March 31, 2018, total household indebtedness was $13.21 trillion, a $63 billion increase from the prior quarter. Overall household debt is now 18.5% above the low in the second quarter of 2013.
Debt in and of itself isn't a bad thing; it greases the wheels of the economy by allowing individuals to make big investments today - like buying a house or going to college - by pledging some of their future earnings.
But as debt levels rise, the household sector will be more sensitive to interest rates, and consumer spending - which accounts for two-thirds of GDP - becomes more sensitive to future income expectations.
Carrots and Sticks
Brokerage firms are employing both positive and negative incentive techniques to drive results. Morgan Stanley
advisers who bring in clients with less than $250,000 in assets stand to face penalties if those clients don't use the technologies and services Morgan Stanley is pushing. And, at Merrill Lynch, advisers who miss minimum goals are punished with a pay cut of up to 2 percentage points.
By now, reports that brokerage firms and banks
incentivize their employees to push certain products or services that will benefit the firm, should not come as a surprise to our Market Digest readers. We have opined in this forum previously that these firms are not Fiduciaries for their clients. They are held to the "suitability" standard which does not require advice to be in the client's best interest. As a reminder, Registered Investment Advisors like New Market Wealth, are required by law, to act as a Fiduciary and put their clients' interest first. This includes often necessary advice around incurring debt. The sales tactics deployed at many of these banks and wire-houses are once again reminders that when seeking investment counsel it's vital to (1) get a sound explanation of why they're recommending certain products or services and (2) ask for full transparency on fees and adviser compensation.
