It's been only two years since Wall Street blew itself up in a spectacular fashion, literally bringing the economy to its knees. And while investors are nervous — many financial institutions aren't even valued by the market for the cash on their books — business is returning to normal.

Perhaps normal isn't the right word. Obviously, Wall Street is hurting and the future is cloudy. New financial regulations are forcing financial institutions to re-rip their business models — to shutter proprietary trading desks and reduce derivative revenues, both once huge profit centers.

“So the business is once again facing a difficult environment — ROEs are likely to decline and institutional equities will have to revise its business model once again,” wrote Brad Hintz, a Sanford C. Bernstein senior analyst and former Lehman Bros. CFO, in a recent research report. Massive layoffs are expected, and some firms (Bank of America?) may have to spin off non-core businesses to satisfy regulators, who want to avoid another debacle on the scale of the subprime blow up.

Note the word “institutional.” On the other side of the house — on the retail side — business is not exactly booming. But the big firms, embarrassed by their investment banking departments, have dusted themselves off and, though they might still be playing defense this year, are planning on resuming growth again in 2011. Case-in-point: Just look at how aggressively firms have been hiring veteran advisors with lucrative compensation plans; they've also re-started their training programs.

In short, we here at Registered Rep. are smelling a good old-fashioned Wall Street fight for retail assets — and a fierce tussle over which firm can call itself the Number One retail wealth management firm on Wall Street.

Never mind that those pesky RIAs and IBDs are growing faster, siphoning off FAs, stuffing record amounts of client assets into their pipelines and taking slivers of market share from the wirehouses. The greatest market share, and the tallest buildings in town, still belong to the banks and brokerages.

The Importance of Being No. 1

Let's face it: Bragging rights on Wall Street are huge. Management obsessively watches the league tables in, say, M&A, equity and bond underwriting and other units of their business. And so too do they obsessively examine performance metrics on the retail side. In fact, call the PR department at any large broker/dealer and inquire about the success of a cross town rival and you will have launched an animated discussion about which firm is truly the better (most efficient, profitable).

The fact of the matter is, bragging rights matter to the rank-and-file financial advisor too. That's true despite the fact that FAs have long argued it's the client relationship with the advisor and not the firm that matters. Take Peter Sargent, an 18-year veteran of Merrill Lynch in Yardley, PA. Sargent has $208 million in client assets, generating about $1.8 million in annual commissions and fees. Sargent is proud to say he works for Merrill Lynch.

Never mind that Merrill was nearly blown up by subprime securities and forced to get bought by — ahem — a consumer bank in 2008! (Please see our annual Broker Report Card package of December 2008, headlined “Dear Management: Thanks for Nothing.”) He still believes Merrill is No. 1 in the retail financial advice business. And he likes being No. 1. It feels good.

“It gives you a sense of being at the top, a sense of pride that you are with the ‘A’ team,” Sargent says. “And then there's the bravado that goes along with it. But I think it also becomes a self-fulfilling prophecy. It attracts more and more clients.” Being at Merrill is like having a client “magnet,” he says.

Who's On Top

Of course, it's true that Merrill Lynch has traditionally taken the No. 1 title among Wall Street retail brokerages. (We're excluding Goldman Sachs and other boutiques from this competition.) But some say that following the shotgun marriages of late 2008, Morgan Stanley Smith Barney, the joint venture majority owned by Morgan, has a chance at that top spot. After all, MSSB's army of 18,087 advisors now far outnumbers Merrill's thundering herd of 15,142 brokers. Even in client assets, MSSB now surpasses Merrill by a hair: $1.5 trillion at Morgan versus $1.4 trillion at Merrill.

Merrill's brokerage is still more profitable than MSSB: It reeled in $315 million more in profit in the first half of 2010 and had pretax profit margins of 16.7 percent (that's nearly twice as large as the 7.8 percent at MSSB's wealth management business). But who gets the crown depends on a bunch of hard and soft metrics: advisor productivity, brand strength, recruiting, culture, quality of products and services — even the cleanliness of its regulatory record.

One gets the sense that this is going to be a battle royale. Merrill — a proven winner, a group of business animals, really — will have to cooperate with parent Bank of America (no easy feat, the cultures are that different). And Morgan, now being led by James Gorman, a Merrill veteran, surely will come out of its own integration process a stronger rival.

Hard Honeymoon

So far, it has been an uneven battle between the dueling titans. Morgan Stanley, after all, is going through a difficult and complicated integration, and Merrill is not. That's not to say that the merger between Merrill and Bank of America has been a piece of cake. FAs do grumble about the bank culture, how it's a bad fit, since banks are command-and-control organizations that don't move like entrepreneurs do. “Bankers are mediocre at best,” says one large Merrill advisor. “All they do is slow me down.” And the brokerage within a consumer bank business model has never worked particularly well in the past, analysts say.

But everyone was waiting for Bank of America to majorly screw up Merrill and so far that hasn't happened, say advisors and analysts. Instead, the bank parent gave Merrill a commercial and retail banking platform that has fattened Merrill's brokerage profits. Meanwhile, there are fewer disruptions for advisors because the Merrill-BofA merger has not required jamming together two brokerage platforms.

“That has given Merrill at least a temporary advantage over Morgan Stanley in how it does business,” says Robert Ellis, principal at consulting firm Fast Track Advisors.

So, for now, you might say Morgan trails. The battle is in the day to day, the unglamorous stuff. For example, MSSB has been introducing a Web-based platform that offers its FAs productivity-enhancing remote access to their desktops and trying to get the legacy Smith Barney cohort onto the platform. Merrill doesn't face that obstacle and Merrill spokeswomen are only too happy to point out that it has offered brokers full access to their workstations remotely since 2005. “We are piloting mobile access to other applications as well, and they will roll out shortly,” said Merrill spokeswoman Selena Morris.

One Morgan Stanley advisor, who recently joined from a competing wirehouse, described the whole process as “irritating.” His tools and systems are just not reliable, he says. (Still, he is satisfied with his decision to join MSSB.)

“They are a disaster,” says headhunter Danny Sarch, referring to Morgan. “I heard an entire banking department went to Citi this week, and they just lost another team that went to Merrill yesterday. It is under siege, people are unhappy and voting with their feet.”

A series of recent high-profile FA departures from Morgan seems to underscore this point. One squad fled to UBS: Jack Schecter went to the latter's 1285 Avenue of Americas office in New York, bringing $430 million in client assets and $1.9 million in commissions and fees. John Walsh and Kenneth White, who managed $183 million in client assets and $1 million in fees and commissions, set up in UBS' Albany office. UBS also picked up William Van Scoyoc, a 15-year Morgan exec who last worked as Morgan's complex manager at 1211 Avenue of the America. He was named complex director of UBS's new office on Park Avenue.

Growing Pains

But that's the glass-half-empty view. Morgan says that, in fact, turnover among the top 40 percent of FAs is at historic lows, and that the integration has so far been a success. “We have met every deadline we've set, are now fully integrated in terms of pricing, FA comp, investment products, branch structure and management,” wrote Christie Pollack, a spokeswoman for the firm, in an email. “We've been upfront from day one that it will take another year or more to create and deploy a new technology operating platform. That's because we're combining strengths from MS (web-based architecture) with those of SB (managed account functionality — an area where we are the clear leader, surpassing Merrill). This takes time.”

Pollack says, further, that not only is the firm retaining its best advisors, it's also very competitive in the recruiting game and has been hiring top FAs. “We recruit successfully against Merrill Lynch all the time and there are many FAs who, having witnessed the Smith Barney Experience under Citi, do not want to work for a commercial bank,” she wrote.

Meanwhile, rumors that Morgan's wide lead in headcount has been thinning as Morgan brokers bolt for the competition aren't borne out by the numbers over the longer term. MSSB advisor headcount is actually up by around 87 since the joint venture closed in June of 2009, when the total was around 18,000. (Morgan had some 8,000 brokers when the deal was announced and Smith Barney had about 12,000, but the latter lost almost 2,000 advisors between then and the time the deal closed.)

After Integration

Ultimately, some analysts think that once Morgan gets through this difficult integration period it will pull even with or ahead of Merrill. Bernstein analyst Brad Hintz is one of them. “MS' retail brokerage joint venture with Citigroup will ultimately give MS control of the largest domestic retail platform as measured by both number of brokers and client assets,” he writes in a research note dated September 15. “This ‘new’ Morgan Stanley will lead an oligopoly of mega-retail channel distributors — along with BAC, WFC and SCHW — that will likely dominate the brokerage market in the coming decade.”

After all, the man running the operation is the same guy who helped to make Merrill's retail brokerage No. 1: Morgan Stanley CEO James Gorman.

“If anyone can do it, Gorman can,” says Rochdale Securities analyst Dick Bove. “I'm extraordinarily impressed by the man's track record, his ability to conceptualize and execute. I think he can do it, but he's not going to do it in 6 months, 12 months or two years. He would have to replicate Merrill Lynch. Create a disciplined sales force. Provide it with a wider array of products to sell. Develop a uniform technology platform.”

In the meantime, individual advisors at the two firms are already duking it out. And at least some of the time MSSB comes out on top. Rebecca Rothstein, 54, an MSSB FA in Beverly Hills, Calif., from the Smith Barney side of Morgan Stanley's joint venture with Citigroup, says with pride that her office is “stealing” business away from its cross-town rival. “We are gaining tons of market share from BofA,” Rothstein said, citing one deal her group successfully wrestled away from Merrill. “We had better client solutions, and we were able to deliver information to the client in a way that was very user friendly.”

“In my marketplace here, the only people we compete with are some of the guys from Merrill and we have yet to lose” she said. (Rothstein, a 20- year vet, is ranked 36 on Registered Rep.'s Top 100 list of wirehouse advisors, and has AUM of $1.95 billion.)

Merrilizing Morgan?

From 2001 to 2005, Gorman led Merrill's private-client group as it set its sights on wealthier clients. He also helped boost Merrill's production per advisor by a wide margin. So when the 6' 2", 52-year-old Australian left Merrill to join Morgan Stanley's wealth management division in 2006, some senior executives he had worked alongside felt betrayed by his departure for a rival, says one Merrill executive.

The personal animosity is long gone, this exec says. But the fact remains that Gorman has deep insight into everything about Merrill Lynch: Its culture, brokerage platform, technology. When he joined Morgan, Gorman immediately set about raising advisor production and client asset levels, just as he had done at Merrill. In fact, at the end of the first quarter of 2006, a couple of months after Gorman arrived from Merrill, average annualized revenue per FA was just $562,000 and average client assets per advisor totaled $70 million. By the end of the fourth quarter of 2007, those numbers had soared to $853,000 and $90 million, respectively.

Today, Merrill advisors are again the most productive in the business. In the second quarter, average annualized fees and commissions totaled $836,000 per Merrill advisor, with average assets per advisor of $93 million. At MSSB, average annualized fees and commissions totaled $679,000 per advisor with average assets per advisor of $83 million.

Morgan spokesman Jim Wiggins claims these numbers distort the reality, as they are lifted by interest income from Merrill's banking business. Once this interest income is netted out, financial results for the first six months of 2010 show that revenue per broker at MSSB was actually $629,000 compared with $559,000 at Merrill, he says.

But that interest income is part of the point: Merrill FAs are making more money for the firm with the lending business they're doing. “We measure advisor productivity holistically and based on a diversified wealth management offering, which is consistent with what clients are looking for and how Merrill advisors are serving them,” says Merrill spokeswoman Selena Morris in response.

Indeed, Merrill FAs got started years ago selling a vast array of lending products to clients: mortgages, auto loans, business loans, for example. The Bank of America acquisition obviously bolsters that effort. Plus Merrill FAs now have access to Bank of America's approximately 70 million retail clients.

Morgan counters that it has advantages with wealthier clients, which are more profitable anyway, because Morgan far outclasses Merrill Lynch when it comes to its institutional offerings, including alternatives, for high-net-worth investors. “Remember, we took Google public,” writes Pollack, the MSSB spokeswoman. “The addition of significant retail distribution power only makes it stronger.”

In the meantime, MSSB is in the process of building out its own banking business. Will it eventually catapult MSSB brokers into a clear No. 1 lead, ahead of Merrill brokers? “Keep your eye on the space, as they say,” Wiggins says.

Merrill is not shivering in its boots, yet. As Merrill spokeswoman Selena Morris says, “This business is a marathon, not a sprint, so we have a healthy regard for our lead in the competition.”