From the September 2007 issue of Research Magazine • Subscribe!

Growth Time

The results of Morgan Stanley's global wealth management group have improved over the past five quarters. What's helped you bring about this change?We've assembled a terrific group of executives. They are responsible for the turnaround of the business. We've drawn them from all four corners of the industry. They are very talented and energized.

It really is a very broad and big team. I'm very proud of what they've been able to do, and the way they are working together.

We just had an off-site [meeting], and the name of the event was "What's Next?" We feel that the immediate turnaround has happened, and now we're focused on growing the business even more than it's been growing.

In the second quarter, the group had pre-tax income of nearly $270 million, a 67 percent increase from last year, and a pre-tax margin of 16 percent. Net sales were $1.6 billion. How do you view recent results for your group?The revenues for the first half of this year are up 17 percent to 18 percent. Most of our competitors are closer to 12 percent or 13 percent.

As for profit margins, it's going very well. We've gone from having extremely poor margins to now having five consecutive quarters of increasing margins and increasing profits.

While I describe the results overall as decent, we're certainly not best in class. But we've had a three- to five-year plan to get ourselves into best-in-class shape. And to be in this position after a year and a quarter is a clear sign that we're showing progress. It's probably a little ahead of where most people thought we'd be at this point.

Again, there's much more to be done. We've clearly shown the business has strong earnings potential, which was the open question a year and a half ago: Could it ever make decent money or was it really just too small when compared with the scale of some of the bigger players? We've answered that.

As Wachovia merges with A.G. Edwards, some industry leaders are saying that this proves that only the biggest will survive in this business. What's your opinion?The argument is not very subtle. If you believe it, then you go and hire as many financial advisors as you can get your hands on. Morgan Stanley did that once.

And what the industry's learned is that productive advisors are really what's important and having a rational cost-basis to support them.

In the last quarter, our advisors did $814,000 in [annualized] production and in 2002, we were at $324,000. And in the beginning of 2005, we were at about $500,000.

The productivity is really the most important thing, and then you build size around productivity. But it hasn't been a huge inhibitor in the growth of our business. We've brought in $9 billion of net new money in the last quarter. And Merrill's number for the quarter was $9 billion with [about] twice as many advisors.

Superficially, you can say that the number of advisors is the most important metric. But you have to be very, very careful in that thinking.

The average advisor we've recruited is doing $600,000, and the average advisor that we're losing to our competitors is doing $325,000 or around that level. Quality also matters a lot.

Still, we've shown growth in our financial advisors recently for the first time in a long time. And we will grow financial advisors. So, I'm not saying that size doesn't matter, but I am saying it's not sufficient.

What is your source of recruits?We are attracting a broad range, including from our traditional competitors. But whereas two years ago we were losing a lot of financial advisors and high-quality ones, now we're gaining a lot of financial advisors and high-quality ones. So there's momentum.

And we're finding some high-end performers at boutique firms. We just hired a very strong team from U.S. Trust in New York. We've hired a lot of people in Europe focused on Russia and the Middle East. We hired a big group from one of the banks in Singapore. There's a lot of broad hiring going on, and there's focus on our main competitors.

We have enormous recruiting momentum. I've never seen anything like it. Part of it is the market, to be sure, and the environment as well as the deal sizes. Clearly, this is working to our favor.

How is Morgan Stanley working with advisors to raise their production levels?There are a lot of alternative investments, structured products, closed-end funds, private equity, infrastructure funds and real estate. Plus, they are benefiting from banking revenues, interest revenues, a new loan account we've created, mortgages and the traditional business; we have a fixed-income desk, for instance, that focuses on the top 300 fixed-income producers; they work with their clients going through books and inventory, reshaping portfolios and being much more active.

We are growing the trust business. We've grown Latin America dramatically. Asia is up 40-plus percent again right now.

These businesses are driven by a broad brush of activity.

Clearly, we're in a good market environment, which everyone benefits from.

The difference between the rate of growth we've enjoyed this year and in the past, and where the industry is, reflects the more sophisticated products we're bringing to clients, which we weren't doing as much before. You increase your share of wallet with clients.

Plus, the success of recruiting, bringing in big producers raises averages.

Does Wachovia's planned purchase of A. G. Edwards affect recruiting?Any major shift in the industry like this clearly opens up opportunities for financial advisors to consider their future and their options. We're likely to see some of that.

What are your key goals for the next 12 months and how important is recruiting?Recruiting is a very high priority. We have a unique positioning in the marketplace, and we're able to attract very high producers who want to be part of Morgan Stanley. We're seeing tremendous talent.

International work and our private-wealth businesses are a major priority. Growing our retirement business and our banking and lending businesses, as well as our capital markets and alternative investments businesses.

How do these priorities differ from those of 12 months ago? Twelve months ago, priorities were to stabilize the organization, deliver a modicum level of profitability, fixing some of the immediate technology issues we had, getting our arms around our legal exposures and our compliance issues internally, and changing the management structure by bringing in a management team that I thought could do a world-class job. These were the priorities associated with a turnaround situation, and [today's] priorities are associated with a stable organization that has more room to grow.

We've worked very hard as a team [to improve results]. I wouldn't say it's been easy, but it's been very focused. The crisis has definitely passed. And the moral in the organization is very strong. Our turnover is down dramatically, and our revenues are growing faster than our competitors. Clearly, we're in a completely different phase of our development than we were a year to a year and a half ago. And the company is also extremely strong. There have been many good things coinciding -- certainly not all our doing, of course.

What is your outlook on the future of fee-based accounts?The account was created to give clients a choice. And I believe, and the industry believes, it was a good service and product, because it let people who otherwise would be paying per trade, pay based upon a fee; and that's how some want to do it. The principal of choice, which the SEC supported, is a very good principle, because it's very consumer oriented. There's been the appropriate restrictions around the levels of trading activity to ensure that those clients with very little trading activity ... are not paying a disproportionately high fee, and that they're alerted to that and can change back into the other structure.

What we have is a legal conundrum over which legislation governs fee-based accounts, and whether you can do principal transactions in those accounts if in fact you're a fiduciary. From the consumer's and the industry's perspective, these accounts are very, very positive. From the legal, regulatory structure, we have an awkward framework, and that's what we're trying to work through now. The courts interpreted the framework as they saw fit. It's a challenge related to a technical breach rather than there being something fundamentally wrong. Clients have been very well served across Wall Street. Most of the firms mimicked the account structure, while the SEC approved and supported it. Generally, people have been very happy with it. So, it's a very odd situation in which we're potentially taking away a clear consumer benefit. And we're working with regulators to see if there may be alternative solutions that might meet the consumer needs and also fall within the right reading of the law.

After a large settlement earlier this year with some former female FAs, what is Morgan Stanley doing with respect to diversity in its hiring?We're constantly looking for talented women and minorities to join the firm. We have a very open, merit-based culture. There are senior [ranked] women on my management committee. Carolyn Gundeck leads the charge on these activities, and we have a diversity-based forum and a women's forum. We are supporting initiatives like those of R. J. Shook [head of the Winner's Circle]. It's something that I hold very dear. The reality is that it takes time. Because of just the sheer numbers in the industry, it takes years to meaningfully move that number and make a difference.

If you're at 15 percent employment of women and significantly less than that in terms of minorities, it takes year to move. We are moving the needle in our hiring.

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Janet Levaux is the managing editor of Research; reach her at jlevaux@researchmag.com.

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