Strategy

Gorman Positions Morgan Stanley to be "The Next Big Thing" in Wealth Management

Matthew Smith, New York, 23 July 2007

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Morgan Stanley’s global wealth management operation appears to have more direction now than ever before under the leadership of James Gorman.

Morgan Stanley’s global wealth management operation appears to have more direction now than ever before under the leadership of James Gorman. Almost two years into an initiative to turn around a business that was lagging its competitors, Mr Gorman is now in a position to talk with WealthBriefing about the firm’s future and a little about his own past.

Analysts in the US pointed to Morgan Stanley’s second quarter results posted late last month as an indication the giant US investment bank had begun to reap the benefits of a major management overhaul and subsequent turnaround instigated by chief executive officer John Mack when he rejoined the bank two years ago.

For the head of global wealth management, James Gorman, that turnaround began when he joined Morgan Stanley about 16 months ago from rival US broking giant Merrill Lynch.

Since then Mr Gorman has been navigating the investment bank into relatively uncharted wealth management waters, along the way making his mark on the organisation and expressing his thoughts about the previous management.

“This was a heck of a challenge. This [Morgan Stanley’s wealth management business] was the poster child for bad management,” he told WealthBriefing.

Last year he was responsible for firing around 500 financial advisors.

“People said that’s a terrible idea, nobody has ever fired financial advisors in this industry. Conventional wisdom says it is all about how many people you’ve got. That was certainly the way this place was run for years, and they ended up with the most financial advisors and they were the least productive,” he said.

Morgan Stanley has since gone from employing the least productive advisors to being among the best in terms of productivity per advisor on The Street.

At Morgan Stanley’s “low point” in 2002, the average revenue per advisor was $315,000 per year. At the end of 2006 following a major cutback of advisors the firm reported average yearly advisor revenue was $720,000; now the company said its average advisor revenue is $814,000 per year.

Morgan Stanley currently employs 8,137 financial advisors with, on average, $89 million in client assets.

Mr Gorman’s priority now is to grow its advisor presence in the US and overseas. He said Morgan Stanley is under represented in private client and brokerage in all the major US markets – specifically New York, Los Angeles, Chicago and Atlanta – and in most international markets as well.

The company is clearly lagging its competitors as a brand in the ultra competitive high net worth advisory space after spending two years cleaning house while rival firms had been acquiring and bringing on new talent.

Mr Gorman said he is poised to expand the firm’s wealth management footprint.

“As a result of being where we are now we can afford to be on the front foot. Instead of working to stabilise the business we can now work on growing it, so we’re in a different lifecycle.”

Mr Gorman has been here before when he was in charge of the US private client business at Merrill Lynch.

“It’s almost identical – it’s almost freakish actually how similar the two stories are if you put a line against it,” he said of the restructure and turnaround at the biggest brokerage firm in the US following the equities crash in 2000.

“We started restructuring Merrill in 2001 and I would say the business was in better shape at Merrill at that point in time [compared to when Morgan Stanley began restructuring 2 years ago] but the markets were worse, so here, the business was in worse shape, but the markets are better,” he said.

Late last month Morgan Stanley reported a 17 per cent revenue increase from Global Wealth Management in the second quarter to $1.64 billion, while the overall company grew its quarterly revenue 32 per cent to $11.52 billion from $8.70 billion a year earlier.

Mr Gorman admitted the recent strong results show unusually high return on equity because of a deposit-sweeping program he instigated during the past quarter. He said ROE is now over 40 per cent in GWM coming from less than 5 per cent a year ago and the business has grown its margin from 1 per cent to 16 per cent.

Morgan Stanley is on a five-year journey to turn around the business, Mr Gorman said.

His definition of success is clear – generating a 20 per cent margin year in year out.

“We have a good market environment, we could actually have much higher margins than we have now, but we’re investing in the business more… we could be well over 16 per cent now if we wanted to be, I don’t think three years from now we would be grateful for doing it.”

Clearly Morgan Stanley’s future wealth management prospects will be in leveraging off an already successful investment banking business.

“I see the quality of the products and the intellectual capital that come out of the institutional business as a distinct competitive advantage. You go to these clients with ideas that the best institutions in the world are getting, you’ve got a leg up on the next regular broker dealer,“ he said.

Mr Gorman expects future profit areas in GWM will come from new business lines including capital markets, alternative investments, private equity, real estate funds, hedge funds, and middle market products – business lines he had only introduced or made formal within the last year and a half.

Rather than see the relatively small size of wealth management in the overall organisation as a disadvantage, Mr Gorman said the stronger investment banking culture brings to private banking a new product innovation culture.

“It still operates as a partnership type structure [at Morgan Stanley] so it’s quite fluid, it’s not a very bureaucratic place. As someone who has been working on Wall Street for a while I haven’t felt any resistance or lack of fair treatment from colleagues,” he says.

Mr Gorman may have felt more accepted at Morgan Stanley than he did during his tenure at Merrill Lynch.

His relegation to a position on Corporate Acquisitions, Strategy and Research within Merrill Lynch after being replaced by his then boss, Robert McCann, as head of the brokerage business, directly preceeded his departure from Merrill.

The press at the time reported Mr Gorman was shifted sideways because he was never a broker and therefore could not understand the business having never been one of them.

Mr Gorman joined Merrill in 1982 from consultancy firm McKinsey.

Mr Gorman admitted he was on a different footing at Merrill Lynch where he ran the private client business before taking the top job at the brokerage firm in 2003 before handing it over to Mr McCann in 2005.

“A lot of financial advisors at Merrill were not outright hostile, but I could tell they were deeply cynical. I understand I would have felt the same way,” he said.

His approach to wealth management and understanding of advisors has been unquestioned at Morgan Stanley. Giving further insight into his insight into financial advisors Mr Gorman said his wife is a former financial advisor, although he declined to say which firm she worked for.

Since selling Quilter, Morgan Stanley’s UK affluent advisory business, to Citigroup late last year, the firm has been clear in its intention to go after the high net worth and ultra high net worth client market both at home and abroad.

However, it is still relatively unclear how the business intends to grow without acquiring advice businesses already in the space.

He said he is looking at a lot of acquisitions in wealth management, especially high-end private wealth management businesses, and he is hoping to get some deals done both domestically and internationally.

Overseas he said the firm was unlikely to add to its existing locations, which include Singapore, Hong Kong, Dubai, London, Zurich, Geneva and Milan.

“Internationally we have a lot of areas we’re poised for growth,” he said. “We don’t need more locations, we need more people in the existing locations.”

In the fee versus commissions debate he admits Morgan Stanley is behind other brokerage firms more heavily weighted to fees like Merrill and Smith Barney as transaction costs come down and fee business continues to grow. That he said will continue to change organically.

His influence within the organisation and his ability to get things done is unquestioned. Having been hand picked by former colleague Mr Mack, Mr Gorman sits on the management committee at Morgan Stanley and is in constant contact with all the decision makers of the firm.

He genuinely believes we are at the beginning of a boom period for wealth management services that will last a number of years and he is positioning Morgan Stanley to be the next big player.

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