From the June 2006 issue of Research Magazine • Subscribe!

June 1, 2006

''Morgan Stanley Shakes It Up

After losing out to Merrill Lynch over a deal with investment manager BlackRock earlier this year, Morgan Stanley has come back with a win or two of its own -- picking up at least three Merrill Lynch executives and winning a legal squabble involving its top rival.

"Merrill Lynch is running scared with their management being taken -- because when good managers leave, they take good producers with them," says Howard Diamond, managing director of Diamond Consulting in Chester, N.J. "It seems that James Gorman is coming in and shaking things up."

But shakeups aren't easy, and some experts see a resulting slowdown in Morgan Stanley's recruiting efforts. "Morgan Stanley's recruiting is almost non-existent," says Mark Bradley, managing director of Esquire Staffing in Chicago. "There's enough turmoil at the branch level that they're not motivated" to recruit.

Gorman, Morgan Stanley's retail chief and a former Merrill exec, successfully fought off a temporary restraining order, or TRO, Merrill had slapped on him in late March over the alleged solicitation of Merrill managers and other staff. New York State Supreme Court Justice Emily Jane Goodman found "a lack of evidence of solicitation" on Gorman's part, it was reported.

"The TRO was meant to stop the [Merrill Lynch] exodus," says Bradley, "and to send a message that it wouldn't take this lying down."

Gorman took charge of Morgan Stanley's retail unit on February 17, roughly six months after leaving Merrill Lynch, and promptly renamed it the Morgan Stanley Global Wealth Management Group.

More recently, he has streamlined management -- reducing the number of regional directors to four from eight.

As part of this effort, he hired Richard Skae, formerly a regional director of Merrill's New York City operations and an ex-UBS employee, and Jerry Miller, formerly chief operating officer for a Merrill Lynch asset management business and a private-client executive.

Miller is now in charge of Morgan Stanley's retail brokers in the Midwest, while Skae heads up the Northeast. Margaret Black is to lead the West; she formerly directed Morgan Stanley's Southern California operations. Bill McMahon is in charge of the Southeast; earlier, he was head of the firm's New York operations

Gorman also tapped ex-Merrill Lyncher Andrew Saperstein as chief operating officer of national sales for the Morgan Stanley retail group.

And in early April, Jeffrey Gelfand -- a former Wachovia Securities chief financial officer and Merrill Lynch exec -- began his move to Morgan Stanley to serve as CFO of the wealth management group.

"He's doing what made him a success at Merrill Lynch, which is why [Morgan Stanley Chairman and CEO] John Mack hired him," notes Bradley. "He's got a template to work with," though some of his restructuring efforts seem to be getting bogged down because of internal resistance, the recruiter adds.

In terms of the legal tiff with Merrill, Morgan Stanley has said its executives cannot be barred from receiving calls from Merrill employees seeking employment with the rival firm.

"James Gorman is too savvy to have gone out and to intentionally have violated a covenant or restriction" in his contract with Merrill, Diamond explains. "If he did, he knows he would see it all fall by the wayside."

Gorman is now functioning as the firm's head of national sales with direct oversight of some 9,000 financial advisors, says Morgan Stanley. Before the appointment of the four regional execs, there were eight regions with two layers of management between Gorman and the regional heads. Now, the regional directors report directly to him.

With this reshuffling, two of the eight former regional managers have decided to leave -- ex-national sales manager Michael Burke and former head of client coverage Rick Sanchez. The others should be given reassignments.

Broker management at other levels has been trimmed from the headquarters, affecting some 20 to 25 individuals. This reportedly represents a cut of about 15 percent of senior management overseeing the retail operations in New York and Westchester County.

Likewise, the geographic grouping of branches and other operations into 61 brokerage areas is being consolidated into a network of 23 districts. And this means that branches should be eliminated in the future as part of the consolidation process. "In the Chicago metro area, there are at least five offices that shouldn't have been opened in the first place," Bradley says. "It's Gorman's job to fix this kind of stuff."

This appears to have left the branch managers swimming in a sea of uncertainty. "There is a tremendous amount of hesitancy to pursue recruiting, because of the fear over the tenure of their own positions and, from the corporate level, what the next stages of change will be," explains Bradley.

This isn't to say that Morgan Stanley hasn't made some reps stellar offers, he says. "But the transition to Morgan Stanley isn't happening," says the recruiter, who works with the company as well as with other brokerage firms.

Some producers with below $400,000 in yearly gross-dealer concessions are "nervous as hell," according to Bradley, especially those in the $250,000-$350,000 range. "We should see some cuts here," he insists, as Morgan Stanley zooms in on getting its average production up to Merrill's average level, said to be $300,000 higher.

Diamond says Gorman's streamlining efforts are good news for many of Morgan Stanley's financial advisors and potential hires. "Some people are talking to us from Merrill Lynch and are looking to jump ship."

"Recruiting is still paramount for Morgan Stanley," adds Diamond, "especially with rising stars. People are seeing what James Gorman is doing and know he's not shooting from the hip. They are feeling confident."

For instance, Diamond Consultants recently placed a $3 million-plus team with

Morgan Stanley.

What next for advisors? "There will be more positive changes to come, and these

reforms will directly affect them," Diamond says.

Others are less upbeat on the nature of these reforms, expecting further layoffs, as well as "forced teams" of high and low producers. "This is the kind of thing Gorman did at Merrill Lynch," says Bradley, "and not everyone liked it."

"Where does the magic dart land?" asks Bradley, as offices get shut down and managers are let go. "People like me are keeping a close eye on this eventuality." May 2006

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