Eric Williams, a retail broker at Morgan Stanley, was minding his own business when the phone rang one Friday afternoon 18 months ago. Williams says he wasn't looking to leave but leave he did — taking only two days to make his decision to jump to Bear Stearns. If Bear Stearns seems something like an odd place for a retail-oriented advisor to land, you don't know the new Bear Stearns and its unit, the Private Client Services (PCS) group.

Williams jumped to Bear because, “Bear offered exciting opportunities, superior technology, open access to top management and smart analysts. It was a unique combo.”

But not all brokers need apply. As one Bear employee says, “This isn't about 401(k)s, mutual funds and IRAs. We deal only with very successful brokers dealing with very successful clients.”

Indeed, Bear has been on an aggressive hiring jag, bringing on 90 new brokers since launching an expansion of its PCS group in 2001. That's a 21 percent increase. Now, Bear has 520 high net worth brokers in six major cities and is well on its way to its goal of around 650 — a goal it hopes to reach within the next few years. In addition to adding more bodies, Bear is trying to offer a more complete lineup of financial products. Traditionally, Bear's retail brokers were more transaction-oriented, but a new system — called the open architecture platform — was put into place to move the group into managed accounts, mutual funds, alternative investments — all types of portfolio management not owned by Bear Stearns

While there's nothing truly unique about offering other asset managers, including competitors' managers, what is interesting is that Bear made the move at all. For a company that is oriented mainly towards institutional investors, specifically underwriting fixed income, Bear's move certainly demonstrates the lure of the HNW retail strategy. Critics contend Bear is simply waking up out of a slumber: It's playing catch-up to other Wall Street firms that have made HNW clients a priority long before this.

Not so, Bear says. “We looked right and we looked left,” says a Bear spokesman, “and we didn't see anybody who looks like us. Salomon Brothers is now Smith Barney, Morgan Stanley is Dean Witter, DLJ is CSFB, Oppenheimer is now Fahnestock.” In short, the boutique catering soley to the HNW has been swallowed up into the belly of the mass-market brokerage, the spokesman says, with the exception of Goldman Sachs.

Of course, in the past few weeks Bear's PCS department has gotten some attention it would rather not have. Four brokers and two assistants were fired in mid-November for their roles in working market-timing trades in mutual fund shares. A lawsuit by a mutual fund investor charged Bear brokers with several abusive trading practices, including creating multiple accounts for some investors and canceling some orders after the 4 p.m. deadline. The market timing scandals are rocking the financial industry, and increasingly the attention is turning to Wall Street firms' private client units.

Controversy aside, there's another reason for Bear's focus on its PCS group — diversification and growth. Bear Stearns believes increasing its service to high-net- worth clients will reduce its reliance on fixed income. “Our broker productivity is three times the industry average,” says Steve Dantus, senior managing director and head of Bear's PCS. “Yet fee-based revenues are half the industry average. Our opportunity: do more business with existing clients [and] attract brokers focused on this business.”

Bear's move toward the high-end retail marketplace makes sense, some analysts say. “Bear has always been big in fixed income, now this expansion builds up its equity area and diversifies its operations,” explains Kenneth Worthington, an analyst at CIBC World Markets. “To that end, Bear has been going after teams of brokers with the types of relationships it needs for this strategy to work.” While Bear needs to keep an eye on the costs and the revenue being generated by the new hires, Worthington says it's still too early to tell how this expansion will affect Bear's bottom line in the long term. (One ominous hint: Bear notched a 14.4 percent rise in compensation costs in the third quarter compared to last year.)

Dantus says Bear is in a unique position to grow its PCS, which, along with its asset managers, in 2003 accounted for around 10 percent of firm revenue. “We're able to expand without changing the culture here because we're not a wirehouse and we're not a financial supermarket,” he says.

“Lots of firms say they're serving the HNW client, but what they have is really the HNW division of this or that wirehouse,” Dantus explains. “That which you think the most about, you tend to do best.”

Still, not everybody's a Bear believer. Some critics suggest this PCS beef-up is simply Bear playing catch-up and taking advantage of opportunities, like Fahnestock's takeover of Oppenheimer.

“I think Bear is just gathering assets,” says one broker headhunter, who asked not to be named. “Bear's always wanted to build a high-end retail division, and now it's taking the opportunity to get these people who didn't want to work at Fahnestock.” In September, Bear picked up five brokers, responsible for close to $2 billion in assets, from Oppenheimer's private client unit.

Not that gathering assets is a bad thing. Last August, Bear Stearns reported it had $25.7 billion in total assets under management, up almost 11 percent from a year earlier. And the evidence shows the new hires are bringing the cash in the door with them. While each Bear broker manages an average of $136 million in client funds, the new hires manage an average of $212 million. Merrill brokers average $88 million in client assets each.

The Open Architecture System

A key part of whether Bear Stearns' ramp-up in PCS will work is a new open architecture platform created by two other Oppenheimer defectors, John Hyman and Fred Patykewich. The system is the cornerstone of Bear's private client advisory service, which the pair launched when they joined the firm last summer.

On the surface, the open architecture platform is simply a bridge between PCS brokers and fee-based asset management. “Our program marries the HNW investor with a full array of asset management capabilities,” says Patykewich. “So we can provide a comprehensive roster of offerings including traditional, long-only structures and alternative investments under a structured asset allocation strategy.”

And the open architecture ensures that, like at many other firms, PCS won't be used to push the firm's own asset management products. “If it's a Bear Stearns product, that's fine,” he adds. “But if it isn't, that's fine too.”

Although it's too soon to quantify the success of its PCS unit, management is keeping its eye on whether there is change in the mix between fee-based and transaction-based business. “A lot of this will depend on bringing in the type of brokers who are already doing this type of business,” Hyman says.

The firm is hiring at an average rate of five a month. It has three main requirements for new brokers. First, brokers must have no compliance problems. (Not a bad rule for a firm that recently dismissed six employees for market timing.) Second, brokers must show a strong desire to be at Bear (it has been three years since a Bear broker has voluntarily left the firm); and finally, brokers have to be among the top producers at their old firms. Among the newest hires are some of the industry's heaviest hitters. For example, Richard Saperstein, consistently ranked as one of the country's top producers, joined Bear in April from Oppenheimer.

Like Saperstein, Williams was one of the early top guns the firm sought. Williams now runs a team of six, which manages assets in excess of $1 billion. He expects his business to triple over the next few years, making him very glad he took that phone call 18 months ago.

“I've never been at a firm that runs this lean,” Williams says. “Every day is an exciting day.”