In his first four months as head of Morgan Stanley's brokerage unit, James Gorman wasted no time showing that a new regime was in place. He eliminated a layer of management, installed his own hand-plucked leaders at the regional level, made a high-profile play for top broker talent from Merrill Lynch — where he headed retail brokerage until last June — and broadcast the message that he expects high performance from existing managers and reps. Second-quarter earnings showed that the new guys can achieve solid results: Retail-brokerage revenues were the best since 2001, and advisor productivity hit a record high.

But he hasn't convinced all the troops that it's worth sticking around to see how his turnaround plays out. The firm lost a net 300 reps in the second quarter (in addition to the 500 trainees who were let go), despite an aggressive recruiting effort. Total advisor headcount stands at 8,179, down from almost 11,000 at the end of 2004.

So far, this has not been such a bad thing. Gorman, in an interview with Registered Rep., says the ones who left were mostly lower-end producers, as evidenced by the vastly improved productivity numbers. But the firm doesn't want to continue losing more reps than it's bringing on board, and Gorman says he expects the rep force to stabilize at around 8,000.

The loss of brokers reflects continuing suspicion of Morgan Stanley management. For example, recent remarks by Gorman about production goals at a town-hall meeting — a videoconference beamed to branch offices in late May — were immediately interpreted as an implicit threat to brokers with smaller books. What Gorman said was that he would like Morgan Stanley to be the employer of choice for $1 million producers. The $1 million talk, he says, was meant to be “aspirational.” What some brokers heard was there will not be room for them.

Even though Gorman has pledged to avoid layoffs of financial advisors, Morgan Stanley reps remember that last summer, without warning, CEO John Mack fired approximately 1,000 reps whose production had fallen short of new minimum targets. “Most of us didn't feel we were safe any longer, no matter how long we had been with MS,” says one Morgan broker with under $400,000 in annual production who recently left for another brokerage firm. “I didn't want to go through the embarrassment of being dismissed and having my clients distributed to other brokers while I was out of work,” he says. Some also construed layoffs of 500 trainees in mid-May of this year to be a violation of the pledge not to fire more advisors, though Gorman insists there is an important difference between advisors and trainees.

There is no question that Gorman wants Morgan Stanley to be more like Merrill and UBS, which have pushed reps to shed smaller clients and focus on getting bigger production numbers out of big clients. So, a company full of $1 million producers may not be the literal goal, but Gorman says he thinks a reasonable target is to raise average annual production to $700,000 per advisor within three years. In fact, he's already more than half way there. Average annual revenue and client-assets-per-advisor rose to $653,000 and $78 million, respectively, in the second quarter, giving Morgan a lead over Smith Barney, and putting it in third place among wirehouses behind Merrill Lynch and UBS. That's up from $554,000 and $70 million in the first quarter, and $472,121 and $59 million in the first half of last year.

“I think you'll be surprised at how quickly we'll get there,” Gorman says. “I think this franchise is much stronger than most people think. We're going to surprise people on the upside over the next several quarters.”

Gorman's plan to push Morgan into the leagues of the top producers will involve broadening each rep's product offerings, he says. That means everything from structured products to alternative investments and banking services, all aimed at attracting more assets. The goal is to make it possible for advisors “to do things at Morgan Stanley that they weren't able to do before,” says Gorman. But adding products is only part of the job, says Citigroup analyst Prashant Bhatia. He figures that the firm will need to make investments of around $200 million to $300 million to upgrade technology and training, including a new broker workstation platform.

Of course, morale is important, too. And that's why Gorman wants to correct the impression that he's planning further layoffs. Although he says he can understand their concern, he has no interest in letting more advisors go. “I told them from the very first week that I would not have any layoffs of advisors, and I will not,” he says. “I've committed to it publicly and privately, and I'll stick to it.”