Morgan Stanley is absolutely cleaning up in the fire sale that is First Republic’s wealth management division. Much has been written about the bank’s fall from grace, its stock price falling from $130 to $12 in the past 60 days. Understandably, many advisors are looking for a life raft.
Morgan Stanley has become the de facto life raft for nearly every meaningful team that has exited in the past month. Morgan Stanley has nabbed five teams in the past three weeks with more than $30B in client assets and $25M in annualized revenue. And several recruiters and managers involved in the ongoing recruiting fire sale say that the exodus isn’t slowing down.
So far, the First Republic to Morgan Stanley recruiting story looks fairly simple, doesn’t it? It isn’t. There is a wrinkle that hasn’t been printed up until now. Morgan Stanley has been the most aggressive and comfortable taking on these teams because of a legal maneuver they’ve instituted in the process: ESCROW.
Morgan Stanley lawyers decided that the best way to handle these shotgun recruitments is to escrow any and all upfront payments to First Republic teams and advisors until previously paid bonuses by FRB and either paid back or litigated and finalized. Agreements have to be met and finalized before Morgan Stanley releases the remaining funds to FRB teams and advisors.
To further describe the process – Morgan Stanley awards a $5M rev team $7.5M in an upfront payment to decamp to MS. They also award them other bonuses tied to asset transfer year over year. The upfront bonus is usually paid out within the first 7-10 business days that the new team has transferred their licenses, but that isn’t the case for these deals. Instead, MS escrows the $7.5M as the team and its advisors negotiate a return on any previous deal they had with FRB (most know that better than half of all advisors that currently work at FRB are on deals as they’ve previously been poached from other rival wirehouses).
Let’s assume that the aforementioned team above collectively owes FRB $4.25M in bonuses. The escrowed $7.5M at their new firm, MS, is used to pay that sum back to FRB, and the remaining amount, $3.25M, is then moved out of escrow and awarded to the team now working at MS.
Morgan Stanley has found a legally clean way to handle a messy fire sale that would seem to be rich with opportunity. And it’s working. While a couple of teams have gone to Rockefeller over the past month or so, nearly all exiting FRB teams have gone to Morgan Stanley.
And one more note, there are some even larger teams that have been reported as of this writing that are slated to leave First Republic. Fire sales aren’t put out very quickly.