From the June 2009 issue of Research Magazine • Subscribe!

Morgan Stanley Moving Ahead With Smith Barney Venture

Executives are selected to lead the Morgan Stanley-Smith Barney joint venture.

Morgan Stanley says it is on track to raise some $8 billion via recent equity and debt offerings, including the exercise of the over-allotment option, and is firming up more details on its joint venture with Smith Barney.

"As we prepare to close the Smith Barney deal, these successful offerings will allow us to maintain some of the strongest capital levels in the industry," says Morgan Stanley CEO John Mack.

These steps and other moves are being handled well, according to at least one industry expert. "They are doing a darn good job on this," says Chip Roame, head of Tiburon Strategic Advisors, a financial-services consultancy in Northern California.

"At the end of the day, I'd give them an 'A' grade," Roame says. "They are filling out the management team, rolling out a brand, explaining how their venture relates to their banking operations and products. That's making a lot of progress in a tough environment."

As for the evolving competitive landscape of the wirehouses, Roame says, there will be four captive firms left standing later this year for advisors to work for. "Merrill Lynch and Wachovia are starting to look pretty similar given their bank parentage," he notes. "And UBS is likely to merge its private banking and brokerage operations."

That leaves Morgan Stanley Smith Barney in a position to become the most brokerage-centric firm, "with brokers leading it and running it," Roame says. "This doesn't necessarily mean that they'll be better or worse than the other firms, but they will be different."

New Execs for JV

Morgan Stanley's James Gorman and Smith Barney's Charlie Johnston recently tapped executives from both brokerage firms to fill key posts in the planned Morgan Stanley Smith Barney joint venture. They also created a new national branch-office system, U.S. Wealth Management, which is being organized into four areas and 20 regions.

The four areas and their division directors are:

o West - Doug Kentfield of Smith Barney;

o Central - Rick Skae of Morgan Stanley;

o Northeast - Ron Ferrelli of Smith Barney; and

o South - Bill McMahon of Morgan Stanley.

Jimmy Tighe and Bob Perry, both executives from Smith Barney, will respectively lead the New York and Los Angeles metro regions. Overall there are 11 Morgan Stanley executives and 9 Smith Barney executives serving as regional directors.

These appointments will become effective at the close of the venture, which is expected to take place in the third quarter of 2009, the company says.

John Campbell, now serving as Morgan Stanley's New York City district manager, will serve as national director of business development for the venture. He reports to Doug Ketterer, COO of U.S. Wealth Management.

The divisional directors of business development are:

o West - John Simmons of Morgan Stanley;

o Central - Rick Capozzi of Morgan Stanley;

o Northeast - Scott Abry of Smith Barney; and

o South - Rich Less of Morgan Stanley.

Latest Results

For the first quarter, Morgan Stanley reported a net loss of $177 million compared with net income of $1.4 billion a year ago. Net revenues were $3.0 billion, 62 percent below last year's first quarter. The company says that the global wealth-management group delivered solid results: net revenues of $1.3 billion.

"In this volatile environment, we have focused on prudent stewardship of our balance sheet, capital and risk profiles, as evidenced by our exceptional capital ratios," shares Mack. "We have also moved quickly to realize attractive new opportunities including the creation of a new industry leader in wealth management with the Morgan Stanley Smith Barney joint venture as well as our new securities joint venture with MUFG [of Japan]."

Morgan Stanley's global wealth-management group stands at 8,148 financial advisors, down about 1 percent from the number it had as of March 31, 2008, and lower than the 8,356 it had as of December 31, 2008.

These reps now have annualized revenue of about $630,000, which is close to a 20 percent drop from the previous year's $772,000 but above the $603,000 of the quarter ended December 31, 2008.

Total client assets stand at about $525 billion, down some 25 percent from a year ago. Assets owned by clients with more than $1 million in assets represent 67 percent of total assets. And fee-based assets stand at roughly 24 percent of total assets.

Client assets per advisor are now $64 million on average, down from $85 million a year ago and $66 million in the quarter ended December 31, 2008.

In the latest quarter, Morgan Stanley advisors attracted $3 billion in net new assets in the United States vs. $8.4 billion in the same period of 2008.

But the unit has seen growth in its bank-deposit program, which stands at nearly $47 billion as of the first quarter of 2009 vs. $33 billion in the same period last year.

The unit's pre-tax profit margin stood at 9 percent in the most recent quarter vs. 41 percent for the first quarter of 2008. It posted pre-tax income of $119 million, compared with pre-tax income of $949 million in the first quarter of last year. The results for the prior year's first quarter included pre-tax income of $708 million related to the sale of Morgan Stanley Wealth Management S.V., S.A.U.

The current quarter results include net expenses of $39 million related to organizational and integration costs for the Morgan Stanley Smith Barney joint venture.

Net revenues for wealth management were $1.3 billion, down 20 percent from a year ago excluding the gain from the sale noted above, the company says. The company says this drop reflects lower asset management and transactional revenues related to a decline in client asset levels, reduced levels of market activity and a decline in underwriting revenues.

In terms of recruiting, Morgan Stanley attracted Irl Solomon to its private wealth management office in Miami in April. He will cater to ultra-high-net worth clients with a focus on Southern Florida and Latin America. Solomon was most recently with Credit Suisse, where he spent 12 years as a director.

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