During his tenure at Merrill Lynch, James Gorman doubled profit margins and raised broker productivity by a third—giving him the ideal resume for turning around Morgan Stanley’s beleaguered retail unit.

Today, after months of waiting for his noncompete to expire, Gorman arrives at Morgan Stanley’s headquarters in midtown Manhattan. Now, Morgan Stanley reps, investors and Morgan boss John Mack will get to see what Gorman can do with a far more difficult assignment. At Merrill, Gorman was able to take a top team and make it more effective—at Morgan Stanley, he inherits a demoralized, decimated sales force that trails its peers in assets under management, productivity and profit margins.

Morgan Stanley reps, who saw nearly 1,500 colleagues disappear since last spring (1,000 through layoffs and nearly 500 defections), offer split opinions on what the new boss can do.

“Most of the rank and file are eagerly optimistic,” says one mid-tier rep. “They think maybe it’s a breath of fresh air, maybe it will give us some more direction. Look at Merrill five years ago and where they are now. We’re hoping that will come to fruition here.”

A Senior Chairman’s Club broker at the firm was more cautious. “He’ll have to do a lot,” he says. “But I think a good shakedown would be very productive. All in all, I think it will be a very positive thing. That said, I want to see what he’s going to do for me.”

Gorman’s long-awaited arrival at least ends a period of uncertainty. Since taking over from deposed CEO Phil Purcell last summer, Mack has ordered cuts at the low end—upping minimum production to $250,000 for brokers with eight years of experience—developed fat recruiting packages for high-end recruits and offered production bonuses to top producers.

But there have been few strategy moves and no big improvement in performance. Morgan’s retail unit had pretax operating margins of 7 percent in the fourth quarter, down from the previous quarter, and down from an average of 8.9 percent in the previous three quarters. Revenue per financial advisor is up, averaging around $490,000 for all of 2005, versus $419,000 in 2004. By comparison, Merrill’s retail brokerage had pretax margins of 20 percent in 2005, and revenue per financial advisor of $734,000. And the other top wirehouses—Smith Barney and UBS—look more like Merrill than Morgan.

Now, Morgan reps are bracing for the possibility of more cuts. Even though the firm has said it does not anticipate further layoffs, reps figure that Gorman will likely raise production quotas to improve productivity—which will result in firings.

A continuing problem for Morgan Stanley is the uneven distribution of talent—a small cadre of top brokers and far too many below-average producers. “They have a lot of really good people,” says Punk Ziegel analyst Dick Bové. “On the other hand, they have a larger number of really inexperienced, untrained people.”

Some of the recently departed simply weren’t willing to wait to see what Gorman can do. “I think it’s going to take a lot more than one guy to turn the private client platform around at Morgan Stanley,” says one top producer who left for Smith Barney in February. “I believe it will be three to five years just for him to narrow the spread with other firms. And it’s not like these other firms are going to stop in their tracks. Me personally, I’m not rolling the dice with my clients, money or career,” he says.

Gorman is beginning his regime by getting to know the troops, the company says. He’ll spend most of his first day on the job meeting with financial advisors in New York. Next week, he will meet with 250 branch managers in Florida; over the next month or so, he will travel to branches in Los Angeles, San Francisco, Dallas, Atlanta and elsewhere to meet with advisors one-on-one and in larger groups.

When he meets the reps, Gorman may hear some complaints about how little the company is offering in bonuses to reps who stay, compared to the handsome packages it is giving to new recruits. In mid-October, Morgan co-president Zoe Cruz told the rep force that “qualified brokers” would receive stock bonuses equivalent to between 20 percent and 30 percent of the increase in their gross production in 2005, if that increase exceeds the overall retail brokerage increase by at least 10 percent. Some new recruits, by contrast, are getting up to 125 percent of trailing 12-months production plus other perks to join the firm. “There’s a lot of resentment over the money being spent to bring big producers over,” says the Senior Chairman’s Club broker.

Some observers expect Gorman, a former McKinsey & Co. consultant, will quickly introduce new strategies for the retail business. “He hasn’t been sitting idly by for the last six months,” says recruiter Rick Peterson. “He’s been doing his research. Within six to eight months he’ll be a huge presence inside the firm,” he predicts.

At Merrill, Gorman developed a team approach to selling and vastly diversified the firm’s product offering. At Morgan, analysts expect that Gorman will develop more alternative investment products for retail customers as well as structured products for high-end clients, while building up the bank channel and increasing mortgage lending.

Those initiatives may not sit well with some top advisors, predicts Bové. “I know for a fact that some of the big-ticket people are concerned that Gorman’s going to change what they do,” he says. “They’re very successful and they don’t want anyone to tell them what to do.”