WealthManagement Magazine

Reshuffling the Decks

The biggest brokerage houses on Wall Street are giving themselves a makeover. Their reinventions, in some ways, are part of the usual ebb and flow between centralized structures to decentralized and back again. But even in the context of such cyclical events, there is an unusual amount of reorganization afoot, with Merrill, Wachovia, UBS, Morgan Stanley and Smith Barney all shaking up their retail

The biggest brokerage houses on Wall Street are giving themselves a makeover. Their reinventions, in some ways, are part of the usual ebb and flow between centralized structures to decentralized and back again. But even in the context of such cyclical events, there is an unusual amount of reorganization afoot, with Merrill, Wachovia, UBS, Morgan Stanley and Smith Barney all shaking up their retail brokerage operations.

Some of the moves have direct implications for retail advisors. Some are aimed at overall organizational improvements. But, collectively, they demonstrate how regulatory and market forces are changing the industry. To remain competitive, improve responsiveness to clients, correct strategic errors and accommodate mergers, the top firms are shaking up their org charts.

Of course, nothing is more important than squeezing more money out of the field operation. “Following the bear market, most of the wirehouses and broker/dealers with asset management arms have become uber-capitalistic, focusing quite intensely on the bottom line,” says Benjamin Poor, a senior analyst with Cerulli Associates in Boston.

Here's a rundown of what the big boys are up to:

Merrill Lynch:
Back in the Trenches

Merrill, known for its frequent reorganizations, announced in September that it has again restructured its branch management system. It is increasing the number of sales regions to 30 from 11 and adding five divisional directors to oversee those regions. The move — which comes four years after the reorganization that split up its sales force into three tiers and called for cutting reps and closing branches — is one of the first big moves by the New York firm's new retail boss, Robert McCann, who took over James Gorman's duties in June.

In addition to creating the new role of divisional managing director, of which there will be five, and nearly tripling the number of sales regions, McCann has doled out additional duties to some of the firms' senior vice presidents, including Mac Gardner, John Cummings and Paula Polito.

What do these moves hope to accomplish? “This new structure will better define roles, narrow spans of control and create a model with a more effective measure against key business drivers,” wrote Dan Sontag, senior vice president of Merrill's global private client's advisory division, in an internal memo to the staff. Translation: Merrill is looking to cut costs, get feedback from the field faster and refocus its efforts on retaining top producers and recruiting new talent. The ultimate goal is better client acquisition and deeper penetration among high-net-worth investors.

In addition, Merrill hopes to deepen its bench by grooming more regional managers who can be candidates for divisional director, or even greater glory, according to a former Merrill branch manager in the Northeast. “They're getting leadership closer to the marketplace and building depth in management,” he says.

The new managing directors include Brett Bernard, who oversees a new Central division in Detroit; Lyle LaMothe, who will relocate from Chicago to New York to run the Northeast division; David McWilliams, who heads up the Western division in Newport Beach, Calif.; and Darcie Burk, who remains as captain of an expanded Latin America division based in Miami. The four U.S. directors will oversee 30 sales regions nationwide, with each responsible for approximately seven or eight regions.

Among the top brass, Gardner will continue in his role as right hand man in running the brokerage group, but will also oversee Merrill's push into mortgages, business loans and other traditional bank products. Cummings, who remains the private client group's chief operating officer, will now also oversee retirement products like 401(k)s and the advisory division that services clients with $100,000 or less in investable assets. Polito will continue to oversee marketing and brand management, but now reports directly to McCann, as does Steve Bodurtha, who is in charge of insurance and products for clients with more than $10 million in assets.

“For reps, I think it's going to give them a feeling of comfort,” says Rick Peterson, a recruiter in Houston. “There will be no more standing in line and problems will be resolved more quickly.”

The former Merrill branch manager says, “There will be more local involvement. It makes a big difference for the branch managers, less so for the producers.” Indeed, part of the plan is to cut costs by having regional managers double as branch managers, saving Merrill some overhead.

The restructuring is reminiscent of the field supervision system Merrill had in place in 1992, with four U.S. divisions and one in Latin America. “It's a confounding element of a firm like Merrill that it goes like an accordion at times, in and out and in and out,” the former Merrill executive says. “[But] there's more turmoil and turnover [now] than in the 20-plus years I've been around the firm.”

Ready for the Nationals

Two years after absorbing Prudential Securities, Wachovia is tweaking its retail brokerage organization to cut costs and solidify its position as a top-tier national firm. Wachovia, the nation's fifth-largest b/d, announced the realignment of its private client group, trimming its number of regions to eight from 10, in late August.

According to a memo from Jim Donley, president of the private client group, the change “improves the operating efficiency of PCG [private client group] by broadening the geographic scope of the individual regions, and, in the process, reducing regional administration costs.”

In addition, the company named David Monday chief growth and productivity officer. As the name implies, he'll be in charge of hitting hiring goals, bringing more experienced reps into the firm and wringing better productivity from Wachovia reps. To cut costs, the firm is centralizing the compliance role at the regional level so that branch managers can devote more time to getting performance from existing financial advisors and recruiting new ones. “This puts the branch manager back in position to serve as a mentor for reps,” says Tony Mattera, a spokesman for Wachovia.

“It's a very wise administrative move. It reduces the layers of management,” says one producing branch manager in the Midwest. Until there are new productivity goals, the changes mean little for the reps. “It means nothing to me,” says one top-producing Wachovia rep in the Northeast. “We're in our own little world with our clients regardless of who is in charge and how many sales regions there are.”

Empowering the Field Managers

Like Wachovia, UBS is consolidating. It has lumped three geographic divisions into two, and reshuffled key personnel atop its branches, marketing and product groups. This is all the handiwork of Marten Hoekstra, head of wealth management, formerly the head of market strategy and development for its Swiss wealth management and banking operations, who took command of the firm's 7,400 brokers in July.

“The new organization gives senior field managers greater flexibility and accountability to meet our goals, optimizing our ability to deliver superior client experiences,” Hoekstra wrote in an internal memo to the firm's reps.

Jamie Price, who will lead the Eastern division in the new structure, has had his old role, creating brokerage products and marketing them, split among former national sales director David Zoll, who heads strategy, and Michael Weisberg, who worked with Hoekstra at UBS headquarters in Zurich until mid-summer. Mara Glassel has taken over as national sales director. Hoekstra also rejiggered its high-net-worth unit, which houses clients with more than $10 million of assets. The group was launched a year ago under Anthony DeChellis and Michael Schweitzer. DeChellis remains head of the private wealth management group, while Schweitzer has become Weisberg's chief operating officer in developing products and services.

The moves come on the heels of another big structural move. In late June, UBS announced that it was combining its two wealth-management businesses under Marcel Rohner to form the Global Wealth Management & Business Banking group. The company believes the larger unit will “generate economies of scale by bringing together functions supporting the advisors.”

But the structural changes may not necessarily trickle down to the reps in the field. “Aside from getting used to a new management style and reporting to different people, the changes will have zero impact in the field,” Peterson says.

Smith Barney:
Life After the Swap

Having swallowed Legg Mason's brokerage unit, Smith Barney must now digest it. What a generous helping, too. By acquiring the brokerage operations of Legg, Citigroup tacked on more than 1,350 reps, raising its total to 13,800. That puts Smith Barney closer than ever to Merrill Lynch, which had 14,690 brokers as of Sept. 30.

In an effort to forge a smooth transition, Smith Barney has been offering some Legg brokers a handsome compensation package to stay with the firm. Still, the cultures of the two firms are very different. Smith Barney is just one unit of a large corporate conglomerate, whereas Legg Mason has a more familial intimate atmosphere.

“We're seeing a lot of high-profile attrition,” says one Smith Barney rep in the Northeast. “And there's some animosity against the Legg brokers harbored by Smith Barney folks that say it's not fair that the incoming Legg reps get sweet retention packages and they receive nothing for their loyal service.”

Says Peterson, the recruiter, “Legg lost more brokers than they thought and will continue to lose more brokers in the coming months. It's not about money, it's about comfort level.” Peterson predicts that within two years, very few Legg brokers will still be employed at Smith Barney.

Morgan Stanley:
Major Surgery

Morgan Stanley, whose retail woes helped to prematurely end the career of former CEO Philip Purcell, is taking actions that most affect rank-and-file brokers — by firing a lot of them. Just weeks after returning as CEO this summer, John Mack ordered branch managers to pink-slip roughly 1,000 brokers. Brokers with eight years or more of experience and annual production below $225,000 were gone. So, too, were those with between five and eight years of experience and under $150,000 in production. Rookies with one to four years of experience, but who had not cracked $100,000 in production, also got the boot. Brokers over age 60 with at least eight years of experience were dealt with on a case-by-case basis. Analysts say that more layoffs are likely as the company tries to catch up with Merrill, UBS and Smith Barney in the quest for high-net-worth clients.

“The trend is moving toward attracting higher producers and purging lower producers,” says Phil Guziec, a stock analyst who covers brokerage firms at Morningstar in Chicago. “As they move up the production scale, margins expand because it costs about the same to maintain a broker generating half a million as it does a broker generating $2 million.”

Brokers who fit the new Morgan Stanley mold are to be rewarded. The company has promised a new bonus plan for brokers who consistently beat their goals, and more expense money to help brokers woo wealthy clients. On a conference call with a bulk of its 9,400 brokers in early October, acting President Zoe Cruz said ramping up expense budgets makes the firm “more competitive,” while its new bonus plan “will help us retain our experienced professionals.”

Morgan may be making the right moves to become an organization that can create a consistent stream of annuitized revenue from well-heeled clients. But, says Jeffrey Harte, an analyst at Sandler O'Neill in Chicago, it's not going to be an easy transition for the former Dean Witter — the Main Street brokerage. “Morgan Stanley has their work cut out for them,” he says.

Expect more shake-ups of Morgan Stanley field operations from incoming retail brokerage head James Gorman. The former McKinsey & Co. management consultant, who headed Merrill's retail group until last summer, is scheduled to start in February. At Merrill, Gorman cut a third of the brokerage force, closed a quarter of its branch offices, overhauled the way brokers work with clients and, perhaps most significantly, revved up retail's focus on the wealthy.

While each firm has its unique challenges and special circumstances, all of these moves are aimed at improving profitability. Overall, the wirehouses are still paying too much for distribution (see related story on page 70), according to analysts. Until that changes, reps are likely to see more reorganization and additional cost-cutting moves.

The Profit Picture — A Mixed Bag

A snapshot of the major firms' pretax profit margins shows improvement year-over-year. But the retail brokerages' profit margins still lag other units, such as asset management, which tend to range from the high-20s to mid-30s, according to Cerulli.

Firm 2004 2005 (YTD as of 9/30/05)
Smith Barney 22.7% 21.2%
Merrill Lynch 19.1 19.8
Wachovia 14.9 18.1
UBS 14.5 14.6
Morgan Stanley 8.0 8.9
Source: Merrill Lynch Analyst Guy Moszkowski; Wachovia
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