Morgan Stanley's retail brokerage is humming.
Is it the magic of one man? One man can't take all the credit for a $5.5 billion-a-year revenue organization. But, James Gorman, who came over from Merrill Lynch to head the wealth-management division last February, can certainly take a lot of the credit. Having just passed his one-year anniversary mark, Gorman seems to have (so far) righted a badly listing ship.
One year ago, even though bad press over former CEO Philip Purcell's ouster and squabbles between shareholders and the board of directors had died down, advisor morale was in the gutter, reps were herding out the door to rival firms, production per rep was the lowest of any of the wirehouses and the future of the unit — and its place within Morgan Stanley — looked uncertain.
Today, it's very rare to find a Morgan Stanley rep who is displeased with the firm's direction or management: Most of the big producers talk about how James Gorman and CEO John Mack “get it,” how they inspire confidence and how they get things done. And the firm is finally recruiting more advisors than it's losing — at least in terms of total advisor revenues. Though he won't provide recruiting numbers, in a recent presentation at a Credit Suisse First Boston conference, Gorman told attendees that in the past three quarters — taking into account those producers who have left the firm and those that have joined — Morgan Stanley has gained a net $11 million in trailing 12-months production. By comparison, it lost $177 million in net production during the five quarters ending in March 2006. Meanwhile, average revenue per advisor has shot up, hitting an annualized $720,000 in the fourth quarter, compared with $554,000 in the first quarter of last year and $472,121 in the first half of 2005.
“The culture's changed,” says one high-end producer in New Jersey. “Gorman brings a winner's attitude. He had a game plan from day one and he's executing it.” Even skeptics are optimistic. One recruiter says there are still plenty of brokers that are jumping ship for other Wall Street firms, and that those who go to Morgan only go because it's so willing to throw a lot of cash at recruits. But even he says that this tactic wouldn't have worked a year ago, and that most of the firm's brokers “feel good about the story, feel good about the stock performance. And Gorman should be credited for that.” (Morgan Stanley's stock climbed 36 percent between February 2006 and February 2007.)
Meanwhile, Punk Ziegel analyst Dick Bové says that he's not yet convinced that the unit is a keeper for Morgan Stanley — it needs to make more money and contribute greater profits to the overall firm. But, he didn't expect to be convinced this soon, either, and Gorman's “doing what needs to be done, and he's doing it right.”
It can't hurt that steps are finally being taken to complete the merger between Morgan Stanley and Dean Witter — a deal that was done in 1997, a full 10 years ago. While the institutional side, originally Morgan Stanley and now called the private wealth division, and the retail side, formerly Dean Witter and now called global wealth management, will continue to operate on separate broker/dealer platforms, the two will legally become one on April 1. At that time, the Dean Witter name will be dropped all together and two firms will be called Morgan Stanley & Co.: A clean break with a troubled past.
Below, Gorman speaks with Registered Rep. about the improvement in morale at the firm, what it took to get brokers turned around, what he still needs to accomplish and how Morgan is different from the rest of its Wall Street peers.
Registered Rep.: By most standards, you have had a great first year at Morgan Stanley. What do you think qualifies as your biggest success?
James Gorman: A big part of what makes large organizations like this work is its heart, and it's quite emotional. And [advisors] have a strong need to belong to a winning organization, one that's confident, that knows where it's going and how it is going to get there.
When I came in, I was totally confident about the organization and what we could do with it. It clearly had a lot of challenges, but they were things you could fix. It wasn't like you had some major catastrophe in the markets that was outside of your control. Our competitors were doing well, why weren't we?
So knowing we could fix it gave us the confidence to tell them that it could be fixed. So, the most satisfying thing is the turnaround in morale. It is just at a completely different level from when I joined.
RR: How do you think you got the message across to brokers that you were serious about the turnaround?
JG: Well, you've got to believe it yourself. You can't fake it. And, fortunately, having been around this now a couple of times and seen it when you have real difficulties — and frankly at Merrill Lynch we hit some serious challenges in the early years in a very difficult market that was declining — here we had challenges in a market that was improving. And it's not like we didn't have the raw materials. It is Morgan Stanley. It's not some little shop. This is an $85 billion company. When this merger was first put together in 1997, the whole industry stood back and said, “Wow, that could really change the face of the industry.” So my feeling was that nothing's changed except that we hadn't managed it. When you tell the advisors you're going to do something, you've got to make sure you know you can deliver on it. And that's how you get their confidence.
RR: So what specific things did you deliver?
JG: Some of the most important things we did were: One, we were very decisive. At the end of 30 days we started making decisions. And we made decisions basically every week for six months. People love that, because they love activity, they love knowing that you can be decisive and that you have a point of view.
Secondly, for the first time probably in the history of the industry, we made a decision to let go of financial advisors. The previous year: 1,000, this year: 500. Name another firm that's done that in the last 20 years. It doesn't happen. And the reason we did that is we had a lot of financial advisors who were failing terribly against any objective measure. And by letting them go, the strong ones in the office say, “Thank God, somebody has finally figured out this isn't just go and hire somebody off the street. You've got to be good in what we do.”
The third thing we did was that we changed probably 80 percent of the senior management. And the fourth thing is financial performance: During the last three quarters that this management team has been in place, we've had three of the best four quarters of the past 24. That's not bad. And in terms of recruiting, we had eight negative quarters in a row. Then we had positive recruiting for three quarters. The average person we recruited was doing double the production of those we lost. This weekend we hired the largest team we've ever hired, with $88 million. And three weeks before that we hired the second-largest team we've ever hired.
RR: Do you think you'll be able to sustain this pace of improvement?
JG: Absolutely. I'm more confident now than I was back then, because then I was looking at it largely as an outsider. I had the first couple of weeks to sort of consume the data and information and all that stuff from the first month or so when we started making the changes, but we were making changes with relatively light experience and information. And now, nearly a year later, we know exactly what we've got and what's strong and what's not, and what can be changed and what can't. And I think we're at the beginning of a five-year run of expansion of this business, which will be terrific.
RR: What are the most immediate things that you want to accomplish here in the U.S.?
JG: Well, it's obviously stabilizing the organization. We stopped our training program for a period of time and, because there's a timeline between when people come on stream as financial advisors and the training program, we will probably see a drop in financial advisors for a period over the first few months of this year. Three and four months from now it'll start picking up. So by the end of this year we'll see an increase in financial advisors. So that's very important to get us back on a strong footing.
A lot of the capital markets and alternative investment products that are now being delivered here domestically for the first time, I think, will be clearly adding to the productivity of the advisors. We're building up our presence in some of the larger metropolitan areas where we haven't been as strong.
RR: How does Morgan Stanley differentiate itself from the other wirehouses like Merrill Lynch, UBS and Smith Barney?
JG: We are an institution for which investing, whether it's for a government, a corporation or an individual, is what we do. That's the front and center of what we do. Citigroup this morning — I'm sure you saw — all that stuff going on over there. Smith Barney is 7 percent of Citigroup. At Wachovia, wealth management is a small percentage of the firm. And for UBS, it's a small percentage of a very large global bank. They have many other things, you know. Citigroup is buying banks in Poland and Mexico, and they're doing many things. We manage people's money and institutions' money. We have trading floors downstairs, we have M&A bankers, we have private equity businesses, we have real estate funds and we manage people's money. This is why we're not in the Discover Card business any more. We are a pure investment house.
In terms of capability, I don't think there's any question that Morgan Stanley's capital markets and investment-banking product desk capability is as good or better than anybody in the world. I don't think there's any question where we stack up as an institution. So we have the ability to offer the most sophisticated kinds of investment products and advice to our clients, at least as well as anybody else in this industry. And we have the scale to do it cost-effectively, which is critical and differentiates a Merrill and a Morgan from a Goldman and a Lehman, very subscale businesses. And it's front and center to what we are as an institution. That's part of our DNA.
RR: What about the old rumors that the retail brokerage will be sold off?
JG: People still speculate that Morgan Stanley is going to spin this business off. I say, well, first, we're just integrating the two b/ds, the legal entities, and it would be a little silly to integrate them and then say, “Actually we were just kidding. It was all a ruse, we were actually spinning it off.”
But, secondly, you can keep telling people, but the only thing that gets them to believe is when you don't do it. In other words, it's just the passage of time. The longer time goes that we haven't spun the business off, I don't know, maybe 90 percent of people believe it now, eventually we'll get to 100 percent. You know, a year ago it was probably 30 percent. So, more time, more success.