WealthManagement Magazine

On the Gossip Trail: Mack to Replace Schaefer—But With Whom?

When Morgan Stanley announced late last week that John Schaefer, the head of Morgan’s struggling retail brokerage unit and an ally of former CEO Phil Purcell, was stepping down, Wall Street immediately began speculating about who will be chosen as his successor. And what that successor might augur for the retail brokerage.

When Morgan Stanley announced late last week that John Schaefer, the head of Morgan’s struggling retail brokerage unit and an ally of former CEO Phil Purcell, was stepping down, Wall Street immediately began speculating about who will be chosen as his successor. And what that successor might augur for the retail brokerage.

The retail unit, called the Individual Investor Group (IIG), has long lagged its peers in profitability and revenue per financial advisor, and critics inside and outside the firm say it should be sold or spun off. John Mack, who returned to Morgan in the role of CEO just a few weeks after Purcell was forced out, has said he supports an integrated model for Morgan Stanley—one that includes both investment banking and retail brokerage. But he could change his mind after taking a harder look at retail from the inside. IIG had a pretax profit margin of 12 percent during the first half of the year, compared with 21 percent at Smith Barney, 19 percent at Merrill Lynch and 15 percent at UBS.

Schaefer was not widely liked by the Morgan broker force, so he will not be missed. Even top-producing brokers complained that he acted like he didn’t have time for them. “If you put it to a vote, he was absolutely detested,” says one former regional manager for the firm. Morgan Stanley announced that Schaefer would be stepping down in an internal memo to staff on July 14. He will continue to head up the business until a successor is found, then work with that individual through year-end “to ensure a smooth transition,” the company said.

Heir Apparent?
Sources close to management say the most likely successors for head of retail are Ray Harris—the No. 2 man under John Schaefer—and Joachim Straehle, head of private banking at Credit Suisse First Boston, Mack’s former digs. “The buzz that I’ve heard, people I’ve talked to, the name that I hear most often is Ray Harris,” says one broker. “He was supposedly the heir apparent to Schaefer.” A Morgan Stanley spokeswoman declined to say how long Harris has been at the firm, or to provide a biography, saying the firm doesn’t comment on “speculative” stories. Harris’ official title is managing director and head of client solutions/product management for IIG. Meanwhile, Straehle couldn’t be reached and Credit Suisse First Boston couldn’t immediately comment.

Harris is widely respected and well liked by Morgan Stanley’s retail brokers, and some of them say they will be disappointed if he doesn’t get the job. “Ray Harris is ‘Mister-Get-It-Done man,’” says one broker. “He came to my office one day and said, ‘Give me some suggestions on how we can improve the firm.’ We sat there for an hour, and then he called different departments at the firm,” the broker says.

On the other hand, Mack seems to be fond of fishing for executives in Credit Suisse’s management pool. Three of three executives recently handpicked by Mack hail from Credit Suisse: Thomas Nides, the new chief administrative officer; Gary Lynch, Morgan’s new chief legal officer; and Stuart Breslow, the firm’s new chief compliance officer. Nides and Breslow worked at Morgan Stanley previously when Mack was last CEO.

Straehle might not be as well received by brokers as Harris. “The little I know is that this guy doesn’t have a great reputation,” says a New York-based broker. “He’s a tough guy, not so personable. I would prefer Ray because I think he’s qualified and does a great job.” Still, if someone from outside the firm can help retail be more profitable and increase revenues, “then I’m all for it,” the broker adds. Straehle headed Credit Suisse’ family-office business until 2000, when he became chief executive of Credit Suisse Trust Group. More recently, he was made head of Private Banking International, and this year, that position took him to Singapore.

Thinking Outside the Box
Other potential contenders, according to industry insiders, include Legg Mason’s head of private banking, Bob Sabelhaus, or the CEO of the Legg Mason retail brokerage, Tim Scheve. One or both of the executives might be looking for a new gig since Citigroup has swapped its asset management business in exchange for Legg’s retail brokerage force. Sources close to Legg say Citigroup has promised to keep the Legg management structure intact when the swap is done, but it would be a temporary measure, lasting 18 months. An executive from Legg’s retail unit might make an attractive pick, because Legg Mason’s retail brokers are highly productive and good at attracting high-net-worth clients. With net revenue per financial advisor of $546,000 and average assets of $69 million per advisor, they are comparable to those at Smith Barney, though lagging behind brokers at Merrill Lynch.

Media reports have floated James Gorman as another possible replacement for Schaefer. Gorman headed up Merrill Lynch’s retail brokerage until recently when he was appointed head of mergers and acquisitions, a position that reports directly to Merrill CEO Stanley O’Neal. But Gorman was not widely liked by Merrill brokers, and comes from a McKinsey consulting background, “so that would be a move in the Purcell direction,” says Danny Sarch, a recruiter with Leitner & Sarch in White Plains, N.Y.

Hint, Hint
If Mack picks a successor from inside the firm, like Harris or a regional branch office manager, it might signal he plans to keep the current structure more or less intact, and depend on new management to increase productivity, say observers. But if he selects someone from the private wealth operation of a rival bank, it might signal that he plans to get rid of lower-producing brokers and close some offices, keeping only the top producers and integrating them into Morgan’s private wealth management team, say brokers. Once the unit had been streamlined, he could either sell it for a decent price, or keep it.

The firm may be moving in that direction anyway. “I think he wants to retain a hard core group of old Morgan Stanley brokers and dump the 8,000 to 9,000 underperformers that they have,” says Rick Peterson, a recruiter with Rick Peterson & Associates. Morgan Stanley had 10,438 brokers at the end of the second quarter. “They don’t need it for distribution. They can move enough [banking product] through their high-net-worth brokers, who are screaming that they aren’t getting enough already cause they have to share with retail.” Peterson notes that the firm just came up with a new recruiting plan to attract $2 million producers and up in the past week or two: It offers 110 percent upfront, plus 20 percent at end of 14 and 26 months for producers who are producing at prior levels within 26 months.

It’s too difficult to get low-producing brokers to change, Peterson adds. “Managers spend all their time trying to get brokers perform at higher level. If they’re not self-motivated, it’s not going to happen. They get comfortable making $75,000 net, and don’t try to grow.” No matter what Mack’s plans for the retail unit, the top job will be a tough slot to fill, considering all of the heat that the retail unit has faced in recent months—from inside and outside the firm. Aside from the lagging profitability, there are the longstanding culture wars between the legacy Dean Witter brokers on the retail side and the investment banking side, which hails from the original Morgan Stanley. Critics say Dean Witter was never successfully integrated with Morgan Stanley after the 1997 merger.

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