Now that James Gorman has been selected as the future head of Morgan Stanley’s retail brokerage, what will he do to turn it around, and can he pull it off?
Most Wall Street analysts greeted the choice with approval, citing Gorman’s success with Merrill, and saying it signals that a sale of the retail unit is not in the offing. But at least one contrarian argues that Morgan Stanley is a challenge that Gorman will be hard pressed to beat (particularly considering he’s not set to start for another six months).
Sure, he posted strong results at Merrill, says Fox-Pitt, Kelton analyst David Trone, but Morgan represents a much harder problem. Gorman had only to tweak Merrill’s strategy, because it had such an attractive customer base with substantially wealthier clients. Morgan will require “a wholesale change in the way guidance is delivered” to attract those millionaire accounts, Trone writes in an analyst note. Attracting millionaires is a lot harder today, now that everyone is going after them, he says. “We continue to believe cold, hard failure will eventually force the sale of the retail brokerage unit, but this will obviously take a lot more time than we thought, and in the meantime, the value of the unit is likely to deteriorate,” Trone writes.
But Trone is in the minority. Most think that by culling the bottom producers, and with the right vision, Morgan can return to its former glory. The former head of retail brokerage at Merrill Lynch, Gorman comes from a McKinsey consulting background, like former Morgan retail chief John Schaefer and former Morgan Stanley CEO Philip Purcell did. Like them, he’s a strategist who never worked as a broker himself, and, though he’s Aussie, isn’t much of a backslapping, beer-guzzling guy. For that reason he was never very popular with Merrill brokers.
But that doesn’t mean he doesn’t understand retail brokerage. During his tenure at Merrill, Gorman vastly improved margins and broker profitability—both of which need serious improvement at Morgan Stanley. Between 2001 and 2005, pre-tax margins at Merrill’s retail brokerage more than doubled to 19 percent from 9 percent, and broker productivity shot up some 30 percent to $711,000 per broker, according to Banc of America Securities analyst Michael Hecht.
By comparison, Morgan Stanley recorded pre-tax margins of 12 percent and broker productivity of $472,121 in the first half, according to recent Merrill Lynch research, lagging far behind Merrill, as well as Smith Barney, Wachovia and UBS.
Punk Ziegel analyst Dick Bové says a major overhaul of the retail unit is needed, and that it will be disruptive, but he expects Gorman will pull it off. “I think he’s going to rip the thing apart,” says Bové. “There’s going to be a lot of screaming and howling inside Morgan Stanley. A whole bunch of large brokers claim they’re going to quit. But I think that Morgan Stanley’s directors, and Mack and [acting president Zoe] Cruz, understand clearly what it is that [Gorman] does and how he does it. And they’re willing to withstand a pretty serious upset within the brokerage operation to get a high return out of it.”
One top broker, who favored acting retail chief Ray Harris for the job, says he thinks Gorman would be mistaken to try to apply Merrill’s culture to Morgan Stanley. “Morgan culture is much more autonomous and entrepreneurial,” he says. “If he approached it like that I think it would be a disaster. Merrill brokers, they’re drones.” The top broker, who requested that his name not be printed, also worries that Gorman cannot address the kind of problem Morgan Stanley has. “Gorman is a strategic thinker. I think this is a people problem,” he says. “Schaefer was a strategic thinker, Purcell was a strategic thinker. How many strategic thinkers can you do?” he asks.
While Morgan used to push proprietary products pretty hard, it gave big brokers a fair amount of leeway in terms of what type of product they sold—whether that was stocks or bonds or mutual funds, says Bové. “Morgan Stanley is still a relatively unstructured operation with limited product array,” he says. At Merrill, they have a rigorous, disciplined team approach, and management dictates whether you will sell mortgages, car loans and other products, he says. “The lack of these systems and disciplines is what was so difficult for Morgan. If you approach business the way Gorman does, you can’t waste time on people with less than a half-million or a quarter-million. These investors are going to be put into direct-access system, and they’re not going to have brokers. So brokers won’t have access to these kinds of clients.”
In other news, Morgan Stanley announced today that it won’t spin off its Discover credit-card business, as former chief Philip Purcell had planned. Gorman has experience in the credit-card business, a point which was noted in Morgan’s release about his hiring Tuesday.