After 11 good years at Morgan Stanley, and with close to $100 million in client assets, one west coast-based broker, who was a member of Morgan Stanley's President's Club, recently decided he was fed up. In September, he signed on with UBS and walked out Morgan Stanley's door for the last time. “I was furious that I had come to the place where I had to make this decision,” he says. “I never planned to leave Morgan Stanley.” So far, he's been able to transfer about 60 percent of his clients' assets.

The UBS recruit is just part of the parade of top brokers who have left Morgan Stanley in recent months. The losses, which began under embattled former CEO Phil Purcell, have not abated since his replacement, John Mack, arrived in June. Since Mack's arrival, Wachovia alone has hired over 65 Morgan brokers, representing more than $2.6 billion in assets, while UBS and Smith Barney have hired many others. Some of the departing brokers are veterans, like Donald McClain, a Doylestown, Pa.-based broker with $190 million in client assets and 25 years at Morgan. He decamped for Wachovia in September. No one could provide a firmwide estimate for how many brokers have left.

Recruiters and analysts say they're surprised the exodus hasn't tapered off, yet, Mack's arrival has done much to quiet the almost daily negative press that plagued the firm in the first half of 2005. Mack has repeatedly said he feels Morgan Stanley is underinvested in the retail brokerage business. And, in the meantime, the firm has upgraded its technology platform and announced plans to offer brokers fatter expense accounts and incentive pay for production growth in 2006, even small raises for sales assistants. But morale at the firm is still low. (Check out our broker report card surveys on p. 38, where Morgan finished last for a second year in a row.)

If Mack can't stem the defections soon, he might reconsider selling the operation, says one analyst. “The rumblings are that he's willing to spend a lot of money to keep it. I think he still believes there is a strong need for a distribution system to be a dominant player in the industry,” says Dick Bové, an analyst with Punk Ziegel. “But at some point, the cost of stabilizing it and turning it around becomes too great.”

Morgan Stanley spokesman Jim O'Brien counters that if the unit were on the block Mack never would have been able to hire James Gorman away from Merrill Lynch to run retail brokerage. Mack has indicated to brokers and analysts that he's giving himself two to three years to turn around the operation, which significantly lags its peers in profitability and revenue per advisor.

But the immediate problem is broker defections. Some brokers are leaving because they're afraid they won't make the cut if Morgan axes another round of underperformers. In August, the firm let go around 1,000 brokers based on low production (under $225,000 after eight years of service). In late October, Ray Harris, the interim head of retail, promised brokers that there would be no more cuts. But many worry that Gorman will change the rules again when he starts in February, after his current contract at Merrill is up. Gorman earned the nickname “Slash and Burn” as former head of retail at Merrill Lynch, where he chucked a third of the brokerage force in four years.

At the same time, top-producing brokers are wary. Some don't think Morgan has a clear strategy, or don't want to stick around to see what Gorman does. “I could have just sat there and built my business off of the people who were let go, but that wasn't what it was about,” says the west coast UBS recruit who left Morgan in September. “It was about whether the firm had a clue where it was going.”

Another broker, who worked for Morgan Stanley for 21 years and managed $78 million for his clients, says at heart he is a stocks-and-bonds guy, and felt like the firm was going to move radically away from that approach under Gorman. In September, he moved to Wachovia, where he gets paid just as much to do stocks and bonds as fee business. “I think Wachovia represents what Dean Witter used to be before the merger with Morgan Stanley, more of a broker/dealer than this huge investment product-type bank,” he says.

It doesn't hurt, of course, that recruiting packages are more tantalizing than they've been in a long time, with firms offering as much as 120 percent of trailing 12-months production upfront. “You don't know if these deals will last forever,” says one California-based top broker, who has no plans to leave Morgan. “I'm probably going to hit myself in two years and say, 'Why didn't I do it?'” Some recruiters think that what the brokerage needs most is a captain, and that Gorman's arrival will stop the broker outflow. But brokers say they're in “wait-and-see” mode where Gorman is concerned. “My business keeps growing here, but I never say never,” says one top producer.