Morgan Stanley brokers should expect a revolution when James Gorman takes the helm of the retail unit.
Gorman made sweeping cutbacks and changes as head of retail at Merrill Lynch, and observers expect more of the same under new Morgan CEO John Mack. However, some question whether his Merrill experience has prepared him for what he'll encounter when he starts at Morgan in six months.
At Merrill, Gorman slashed a third of the brokerage force, closed a quarter of its branch offices, overhauled the way brokers work with clients and, perhaps most significantly, intensified retail's focus on the wealthy. Between 2001 and 2005, pre-tax margins more than doubled to 19 percent and broker productivity rose 30 percent, to $711,000.
In some ways, Morgan isn't far from where Merrill was when Gorman first got his hands on it. The Morgan retail unit had pre-tax margins of 12 percent and average broker productivity of $472,000 in the first half of 2005, Merrill Lynch research shows.
But Fox-Pitt, Kelton analyst David Trone argues that there is one large difference between the two firms: Merrill started out with substantially wealthier clients and attracting new millionaire customers is a lot tougher today.
“We continue to believe cold, hard failure will eventually force the sale of the retail brokerage unit,” says a Trone analyst note.
Lehman Brothers analyst Mark Constant adds that replacing underperformers with top-producing reps could be very expensive.
Still, the naysayers are in the minority. Most think that by culling the bottom producers, and with the right vision, Morgan can return to its former glory. The process of cutting underperformers may be completed even before Gorman steps in — rumor has it another 2,000 brokers will be booted before the end of the year — “so that he's not associated with them,” says Punk Ziegel analyst Dick Bové.
