Two years ago, Morgan Stanley had an image problem. Financial advisors were so down on the firm — then plagued by executive infighting, badly in need of investment in retail brokerage and bleeding advisors — you couldn't have paid a broker 500 percent of his trailing 12-months' production to move to Morgan Stanley. At least that's how one recruiter put it recently. It was an exaggeration, of course, but one meant to underline just how dramatically things have turned around since then. According to four prominent and independent FA recruiters surveyed by Registered Rep., Morgan Stanley is faring significantly better than its competitors in the current recruiting bonanza.

And what a bonanza it is. Reps at the major wirehouses (including Morgan Stanley) are switching between rival firms at unprecedented rates, given that the ties that bind — company stock options — are severely weakened. (The iShares Dow Jones Broker/Dealer index is off by 34 percent in 2008.) After all, they want to recoup the massive losses to their personal wealth that have been inflicted by their firms' incompetence in the credit markets. Some of the departed say they are leaving to protect their clients from the black clouds of write-downs, negative earnings and scandal. But, in the midst of this recruiting tornado, Morgan Stanley stands out. It's definitely been having more success than its peers at convincing advisors that it is the place to be.

How is Morgan doing it? Money is part of it, of course. Morgan Stanley is paying handsomely for top producers. But Morgan does not always pay the most, according to recruiters. There is another important element: While Morgan has been battered by the mortgage crisis like the rest of Wall Street, it hasn't seen its name splashed across the news as much as its rivals. When one thinks of write-downs and capital injections, UBS, Merrill Lynch or Citigroup come to mind. (Of the five wirehouses, only Wachovia has taken a lighter hit to its balance sheet.) And thus far Morgan hasn't had a headline-grabbing scandal or a series of executive dismissals like the ones seen by its peers, which have dominated media reports for the last nine months. (Morgan already went through that when John Mack was brought in after Philip Purcell's messy ouster.) In short: Morgan appears to have been tarnished less.

But that isn't the only reason Morgan has gone from black sheep to favorite in such a short period. The firm also has a real story to tell. In the past two years, Morgan has seen a remarkable turnaround, especially in its private client group, analysts say. Credit is given to CEO John Mack, who did the initial spadework resurrecting the storied Morgan brand and its business lines. Hiring James Gorman — who is now co-president of the firm — from Merrill to run global wealth management certainly got the industry's attention. Gorman started at Morgan Stanley in February 2006 and went to work quickly, wielding the margin-focused formula he used to revamp Merrill's retail brokerage (a call center for small accounts, forced attrition of low-end producers and aggressive recruiting of rainmakers). He also invested heavily in technology and platform improvements, and lured some talented managers from Merrill and elsewhere to drive the upgrades — including Rick Skae, who after a number of promotions now oversees half the country's advisors as divisional director of the Northeast and Central divisions.

Skae had been passed over for a divisional director job at Merrill when Gorman hired him; Jerry Miller, who is now president and CEO of Van Kampen Investments, had been COO of Merrill Lynch Investment Management's global proprietary business; Andrew Saperstein, who is COO of national sales, was formerly COO of Merrill's call center. This April, Morgan added former Fidelity Brokerage President and rising star Ellyn McColgan to the team. She is the new president and COO of Global Wealth Management, filling Gorman's old shoes, and will report directly to him.

“He clearly restructured that business,” says analyst Dick Bove, of Punk Ziegel (now a unit of Ladenburg Thalmann). “I think he eliminated the lack of professionalism that was characteristic of Dean Witter, and that is evident in the quality of the people they hired.” In the end, if leadership and tangible operating improvements are responsible for Morgan Stanley's recent recruiting success, so too is the market turmoil and bad news emanating from the financial industry in general. Morgan Stanley turned itself around, and reformed its image just in time to capitalize on the turbulence at other firms.

SIGNED, SEALED, DELIVERED

“We want to grow through acquisitions, and are looking for appropriate deals in Swiss private banking, as well as domestic options,” Gorman told an auditorium full of competitors and potential business partners at the UBS 2008 Global Financial Services Conference in May in New York. He finished that sentence with “but we haven't found any.” But he might have continued with this instead: “In the meantime, we're enjoying great success poaching the best advisors at many of your firms.” (Again, Gorman didn't say it — but it would have been accurate.)

That's not to say that Morgan hasn't suffered its share of high profile defections: In February, 10-year veteran Bill Gurtin, who managed $5 billion in assets, left to start his own RIA. In March, a team of 10-year veterans — Christopher Errico and Sean Kilduff, who together had nearly $20 million in trailing 12-months' production — joined UBS. Ira Walker, a 21-year veteran and $9 million producer, also joined UBS in March.

But the numbers don't lie: Through May of this year, Morgan Stanley has added a net 250 new advisors, averaging $831,000 in trailing 12-months' production and $99 million in assets under management — what amounts to a good year at many firms. By comparison, in 2007 Morgan added 232 net new financial advisors, up from a net loss of 380 in 2006. The new arrivals join an already vastly improved lot: At the end of the first quarter of 2006, only a couple months after Gorman arrived from Merrill Lynch, the average annualized production of Morgan Stanley FAs was $562,000, with an average of $70 million in assets under management. By the end of the fourth quarter of 2007, those numbers had increased to $853,000 and $90 million respectively (before falling to $761,000 and $85 million in the 1Q 2008).

What a long way Morgan advisors have come. In an August 2005 research note, David Trone, an analyst at Fox Pitt Kelton, said that, “If Morgan Stanley's retail unit has any chance of eventual success, Gorman is more likely than anyone to make it work.” He continued, “The bad news, in our view, is that this is a very serious long shot.” After all, the clients were wealthier at Merrill and the advisors were better — four times better — in terms of profits. Now, average annualized production per advisor is a lot closer to Merrill's ($832,000 as of 1Q 2008), and Morgan's clients are far wealthier than before: Today, 72 percent of Morgan Stanley accounts are now $1 million-plus, up from 65 percent in the first quarter of 2006.

For the rest of firms, 2008 hasn't been nearly as kind. Take Merrill Lynch. The venerable leader of the pack in terms of production and assets, Merrill is famous for its low attrition and has a reputation for being hard to recruit from. But early this year it was losing more reps than it was winning. According to an internal Merrill Lynch report titled “Americas Wealth Management, Sales Force Competitive Hires & Losses,” Merrill recruited 140 advisors through May 2, with a combined total of $87.9 million in trailing 12-months' production. But, in the same period, it lost 200 advisors representing $109 million in trailing 12-months' production; that works out to a net loss of 60 FAs and $21.4 million in production. What's more these FAs ended up at Merrill's rivals down the Street: More than half (34) of the 60 advisors, accounting for $29.7 million in production, went to one of the other four wirehouses, according to the report.

“That's really bad,” said one former Merrill executive familiar with the firm's history of recruiting and attrition. He added that as far as he knew Morgan Stanley had not picked up more of the departing FAs than any other firm. However, a current Merrill Lynch executive familiar with Merrill's recruiting numbers said the firm “is up for the year against every wirehouse except one: Morgan Stanley.” In other words, in the net give and take of recruiting between firms, they've stolen more advisors from every other firm than they've lost to the individual firm.

And Merrill is not the only one suffering. According to Rick Peterson of Rick Peterson & Associates, “several firms are bleeding brokers,” much of it fueled by wave after wave of bad press, he says. Peterson adds that while Morgan Stanley is benefitting the most of the wirehouses, the independent channel is also winning — at the expense of the big firms. (See this month's cover story on page 38.)

PAYING UP FOR PRODUCTION

One recruiter, who wished to remain anonymous, was critical of the size of the packages Morgan Stanley was offering, as well as the speed at which he said the firm made some of its hires — particularly from Bear Stearns. Andrew Saperstein, COO of national sales, dismissed both allegations as inaccurate. “The offer actually is not as high as some of our competitors,” he says. (A statement recruiters say is true some of the time, but not always.) Saperstein also says that management has been very selective, using extensive background checks and careful evaluation of each rep's book. Morgan Stanley's standard offer is 120 percent of trailing 12-months' production upfront, plus the possibility of another 100 percent if the advisor meets expected asset and productivity targets down the road, Saperstein says. Contracts are for anywhere between nine and 12 years. “When I hear people say that what we're doing doesn't make economic sense, well, okay, if we get the wrong people,” says Saperstein. “But I think we've done an incredible job of getting the right people.”

How many exceptions to the “standard offer” have been made is unknown, but they do exist: The lead advisor for a former Merrill team with $3 million in production who recently joined Morgan, said his team's deal was “significantly” more than the standard — though he wouldn't disclose the actual figure for fear of identifying himself — and included a seven-year contract.

A big upfront paycheck is central to any advisor's decision to move and, let's face it, sometimes it's the only reason. But analysts like Bove say reps can see and touch the improvements at Morgan Stanley: The platform's product line is broader (more alternatives), and open-architecture has minimized the use of proprietary products. Gorman also created a capital markets group within wealth management to help advisors tap into the institutional securities franchise for product and idea flow. Improvements in technology, a much-neglected area before Gorman, according to reps, have also been extensive.

“If you're an FA that manages your own money, there's no comparison,” says a recent recruit from Merrill. “If you use the money managers or mutual funds on offer and just supervise the assets, there's probably no difference.” He manages his own money, so access to investing ideas or specialty products (structured products, for example, even though the firm has paired this area back), as well as the firm's traders is key, he says. Morgan has Thomson, so did Merrill. But the rep likes that Morgan's FID Select, a bond analysis and selection program, allows him to look at his own firm's inventory of bonds as well as what else is being offered on the Street. One area he says lags Merrill, and probably some of the other firms, is the alternative investment offerings. Former Citi executive, Jacques Chappuis is heading the operation and is currently working towards expanding the range of available products. Reporting to Chappuis is John Barbo, who helped build Merrill's alternative investment platform as national sales director for its alternative investment group, and recently joined Morgan.

LESS TARNISH OR MORE VARNISH?

Research analysts are generally in agreement that the entire financial services sector is in for a rough string of quarters (there are certainly more write-downs to come, and earnings from CDOs will not be easily replaced). But some firms are better situated than others to weather the dismal earnings forecasts. Bernstein research analyst Brad Hintz says, “We favor those firms with the most diverse business mixes and strongest liquidity positions. We rate Morgan Stanley Outperform based on its diverse revenue base, its improving balance sheet evolution and its strong cash capital position,” he writes in a May 27 research note.

That “best of a bad lot” distinction is an important, if not the driving reason for advisors departing their firm to choose Morgan Stanley over another. For instance, the ex-Merrill advisor mentioned earlier? He got a call from a recruiter on the day Merrill's fourth quarter earnings came out — it was good timing. “How does your firm lose $32 billion? They put 50 percent to 60 percent of the firm's capital into one investment — sub-prime. And we're supposed to tell people how to manage their money?”