James Gorman, head of Morgan Stanley global wealth management, reflects on the turnaround of 2006 and what lies ahead. In his conversation with Research, which took place in New York in late December, he first reviewed the division's fourth-quarter results.
Morgan Stanley Wealth Management 4Q'06
Pre-tax income: $171 million (up 104% vs. 4Q '05)
Net revenues: $1.4 billion (up 12%)
Total assets: $686 billion (up 11%)
Fee-based assets: $206 billion
Financial advisors: 8,030
Annualized revenue per advisor: $720,000
Average AUM per advisor: $85 million
What's your take on the latest results?
I thought they were terrific, to be honest. They're up over 100 percent year over year. It's the best quarter we've had in six years, and the best revenues we've had in six years.
They're not were we want them to be in terms of where they can be. But in terms of our past and the fact that we've been through a major restructuring this year, to show that kind of progress and momentum in a short period of time is terrific. I'm very happy with this.
We also had record productivity per advisor and record assets per advisor; record bank deposits and more ...; we basically broke the records on most of the metrics we follow. Our pre-tax was our third-consecutive quarter of increases and, again, the best numbers in six years on an operating basis.
It was a great way to close out these very eventful nine months that we've been through, since the new management team came on board. And it's been a long, long time since this business had three consecutive quarters of earnings increases. In fact, each of the last three quarters is among the top four quarters of the last six years.
What's driven these recent results?
There are many factors. It's involved a complete overhaul of the business over the past nine months. We changed a large percentage of the management and let go a number of financial advisors who were not performing. We changed the compensation programs and the training programs, looked at our cost base and rolled out a number of upgrades on the operations and technology front that enhanced our client experience.
We had positive net new money flows for three quarters in a row. We've announced the sale of a business in the United Kingdom that's not core to what we're doing, and we're restructuring the trust business and accelerated the growth of the mortgage business. We re-priced a number of our fee structures that were badly priced. It's probably about 50 different initiatives that really contributed [to our results]. These businesses are really about building blocks. You don't see massive swings. What you want to see is consistent progress, and that's what we're aiming for.
Can you discuss the new role of Todd Taylor, who will head up your talent management efforts this year?
Managing talent is one of the most important things we do as an organization, because we hire so many people each year and we're a people-based organization. We wanted to bring somebody in who would run the recruiting, training and hiring processes on a coordinated basis.
Todd [Taylor] is an outstanding executive, and he's been an assistant or deputy for the Northeast region; he's worked in the home office and is uniquely qualified to this. He'll run the talent functions ... and this is not of a revolution, but an evolution of the organization; it's giving more shape and focus to critical areas.
He'll be helping to reshape new training programs that we're rolling out, and he'll be responsible for driving our recruiting efforts. In the last nine months, we had very solid recruiting, and we'd like to continue to find ways to improve it.
How is recruiting going?
We've had positive net revenues now from recruiting after two years of negative numbers. So, we've seen a significant turnaround in that. It is a very, very hot recruiting market, and that will probably continue for a while. What you've got to focus on recruiting people of very high-quality people who are going to stick and bring new business. It's "buyer beware." You've got to understand the books of business you're getting. And we feel we have an experienced team that's done a good job of that.
The average person we've recruited has produced significantly more than the average person that we've lost.
Are you comfortable with an advisor force of about 8,000?
Yes, or thereabouts. I'm not that focused on it. I'm much more focused on quality.
It could conceivably go down a few hundred or go up a few hundred. We expect to finish '07 slightly higher than where we start '07. Again, we're focused more on quality, and we're certainly past the period when you're going to see massive runoff. We're certainly not going to shrink the organization anymore. Now, it's just the natural ebb and flow, with hopefully over the next year or so, some modest growth in the headcount.
The average annualized production of your advisors stands at about $720,000. How important is that figure in your recruiting efforts?
Our average recruit has been doing over $600,000 in annual production. So we virtually have been close to that level. That's in 2006 under the new management team.
These are just averages. We have people we recruit who have been doing more than $10 million [in 2006], and some doing $100,000. They're at very different stages of their careers. Our "rising star" program targets younger people early on in their careers who are unhappy with the companies they've joined and who want to join us, or people in a town were we are the dominant presence, so they want to join us. So, we get a full range. And the figure [$600,000] is just an average. The distribution is very wide. But where do you end up on average?
For part of this year, we were recruiting about double the level we were losing in terms of production. And that gives you an indication that we are successful with high-end people. But we also have recruited a lot of people doing $100,000, $200,000 and $300,000. So, $600,000 is not a bar that you have to be over, it's just a mathematical average.
Really, the way I'd put it is that we've always been good at attracting those in the $100,000 to $400,000 range. But it's only recently that we've been able to attract a number of people with $1 million and multi-million dollars in business. That's the difference now for us. We've had these people come in from our traditional competitors, and also some come in from boutiques and private banks -- the full range.
Recruiting for all the firms is the same. Whether you're up or down a few dozen brokers doesn't fundamentally change your [financial] health. But it's an indicator of your health. If you're losing a lot of people, as we were for two years, it's not a good thing. But we're not losing like that anymore. We lost 40 people in the last quarter. That's the way everybody loses. But you just want to have your share of outflows, not a disproportionate share.
Similarly, if you can't attract big producers, that tells you something about your business. And in the last six to nine months, we've attracted a lot of big producers. And in the last month, we've attracted two teams that are record teams for this company in private wealth. We weren't speaking to teams like this before; now we're hiring them.
About 90 percent of the very big producers in this business, those doing over $1 million, are in teams, though we also hire single producers. We just met with a team of two people, and I'm meeting with a team of three people this afternoon. I see a recruiting team almost everyday I come to work. And these big, complex teams are very different animals from the rest of the industry.
About 30 percent to 35 percent of our advisors are in teams, and it's a focus of mine. People in this industry are generally better off working in teams; they're more professional.
We've shrunken the number of branches as the headcount has changed in recent years. But very recently, it's moved very little. We might have closed 10 or 11 branches in the last quarter out of about 480. But that doesn't mean that we've left these markets... sometimes it's just an issue of consolidation within the same buildings.
And we're very opportunistic. We've just opened a branch in Miami for Latin America and a larger branch near our headquarters in Westchester, N.Y. And I've just given approval for another branch in Texas. But this really is about the square footage more than the number of branches, though we don't publicly disclose that number.
How much pressure does the independent-brokerage field put on Morgan Stanley?
Frankly, I think that this pendulum has swung too far. There are too many people going independent who many not fully appreciate the administrative burden of running their own office and the risk that they undertake by being independent and basically carrying all their own compliance, controls and responsibilities, which I think are enormous.
I suspect the pendulum has swung too far and will come back once we have a correction in the market. These things always look better in a good market.
Unlike those going independent, we have an $80 billion company standing behind us, and that gives us the financial flexibility to continue investing [in our operations]. And we'll continue investing no matter what the market cycle is, because this is a business we can grow in. And this business has not been focused on [and invested in] in the ways it should have been in the last six years or so, meaning it's underperformed.
And in a down market, that wouldn't be a bad thing for our business, because the stronger firms get stronger.
In terms of current investments in the business, we just rolled out new workstations for our advisors and launched a number of new product groups that we didn't have. We have built up our banking and lending capability, which we didn't have ... and we've completely changed the way clients deal with us online. And we've changed the whole account-opening process and the loan-transfer process, while putting 200 risk managers in place throughout the business.
And, at the same time, we've taken some costs out of the business while trying to drive up the profits. It's a balance between making the investments, which obviously hurts [in the short term] but build your business for the future. And you want to get costs down when you can, so you can get the whole alchemy right, and it spits out good short-term and long-term results.
In 2002, the average production here was $324,000, and we were number five among the big five firms. And today, it's $720,000, and though all the numbers [of our competitors] haven't been reported, I suspect we'll be number two.
In 2005, we had negative money flows. In 2006, we're positive $8 million or $9 million. We just had sequential revenue growth of five percent and were up 12 percent year over year. Clearly, the business has a lot of positive momentum now that we didn't have.
Is the hardest part of your job over then?
We're not quite there yet. I've always said it'll take about three years to get where we needed to be, and we're nine months into it. But, we've made more progress than probably most people thought we'd be able to make in that time period. It's been faster than was generally anticipated.
Did the up market help?
Not much, to be honest, because the market doesn't help you on things like attrition and recruiting, or with launching new products and new businesses. Plus, the affect of the market hasn't really been seen until very recently. That's a lag effect on consumers.
To be honest, I think we made a lot of good decisions, and we made them quickly, which means we got results quickly. But, more importantly, the core business is much stronger, and the client base much wealthier, and the financial advisors much better than their outside reputation. So, once you've taken away the parts of the business that were not very good, what you're left with is a little gem that really just needed polishing. That's why the turnaround has happened quicker than more people thought, because they'd underestimated how good the core, the heart of this business, was. And that was one of the most important, and most pleasant, surprises I've had in coming here. Once we figured out what was no good and got rid of that, what was left was actually really, really good.
What are your priorities in 2007?
We've got to make sure our training programs are put in place right. And we've got to continue to train and hire people who can be successful and expand internationally where we have enormous potential in South America, Europe and Asia. We've got to take advantage of some of the initiatives we've put in place on the product side, like alternative investments and structured products, and other things we're doing on this front. We've got to continue to grow our small business and banking capability, which is very small and is a very important focus for us.
We've got to stabilize the turnover in the sales force, which is generally done, but that we want to continue to see over several quarters. We made a lot of changes to things like compensation systems and management structures, and now we need to execute on that. We've laid the groundwork for the program, and now we have to do it. We've started initiatives to form better partnerships with the institutional side, so this cross referrals of clients, when a company goes public with us, what role can we play with the executives of those companies to help them manage their private wealth is targeted. We've set up a program to do that, but we have to execute on it. We will now have one risk manager for every 50 financial advisors. We need to see how this leads to better controls and risk management and fewer legal expenses within the business.
Last year, we made some big decisions. This year is more of the show-me year. And I'd like to see us get real traction across a host of measures.
Can you share more about the Dean Witter integration?
We are in the process of integrating the [Dean Witter] broker dealer, the legal entity, by May 2007. It's not quite as big a deal as the attention it seems to be getting. The businesses are quite different, and there are some good reasons for this...
Still, from a client perspective, it was terrible. And from a financial-advisor perspective, it didn't encourage partnering. So, it was a decision that should have been taken seven or 10 years ago and wasn't. I don't know why.
Now this change will take place. It will be over a couple of years, and it's a commitment John Mack made when he came back to Citigroup in
It's also a symbolic gesture, because it says we're one company. And, now, maybe they'll be less speculation that we're going to spin off this business -- because we're not ...
The businesses are quite different, and there are some good reasons for this. The old Morgan Stanley program functioned mainly for institutions while DW is a traditional brokerage model. The problem was that the legal entities.
Can you some up the morale within this division and its current momentum?
Making as much progress as we have, gives us the confidence that we need to consider making acquisitions. When I came on board [in February 2006] that was not the case; there were people leaving, lots of disillusionment and questioning -- was the business being kept or not? Did it really belong? It made no money, effectively. A real crisis. That is now completely past. And I think morale is dramatically different, which changes everything.
We have a new ad campaign coming out in 2007. It's important to do, to have a new voice out there. It's a good campaign; I don't believe advertising fundamentally changes your fortunes; it's an exhilarant to your business. It's not going to drive us to a new level. Client relations are very personally driven. It's important to advertise, when people are willing to listen to you. And now we have an audience that looks at us and says, "You know what? This company is doing pretty well."
We can start getting more aggressive. A year ago, we couldn't, and I thought it was too early [to start a new ad campaign] when I came on board. I wanted to wait until we'd had some progress.
This is a building block business. You need to stabilize and grow your financial advisors. You need to be aggressive in markets that offer new opportunities, and Latin America is just one example, among many. You need to offer products that you haven't previously offered, like small-business lending. It's the gamut. That's what this business is all about -- and having discipline.
The people who are winning in this business are the people who have the discipline to execute across a whole range of things. What this industry has had is a history in which players have tried to win by making one big, bold move. And Morgan Stanley made a decision to be number one back in 2000-2001, became number one for a short period of time by hiring a lot of people. That's not a business model. That's saying, "We're going to be 50 percent international, etc." So, today, it's about staying away from the idea of that single, perfect shot. It's about getting 100 things done, a bit better each time. You build up a base that is unassailable, and once you've got it, it's very hard to undo it. And that's what will take [another] two or three years.