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)
What Your Peers Are Reading
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.