Now work really starts at MSSB

Morgan Stanley was widely seen as the winner in the deal announced last week to purchase Citigroup Inc.'s stake in Morgan Stanley Smith Barney LLC. But the company could end up on the losing side of its longer-term challenge: Expanding the retail-brokerage business. Problems with MSSB's technology platform pose the immediate challenge, but brokers and other observers say the bigger issue is a culture clash that has left legacy Smith Barney reps feeling demoralized, as well as continuing cost-cutting that could cause more of the firm's brokers to jump ship. One former Smith Barney broker, who recently left the firm and asked not to be identified, said the overall integration of the Smith Barney workforce into Morgan Stanley “is a disaster ... It's a different business model at Morgan Stanley. It's not consultative. It's the old broker-dealer approach of ... manufacturing and selling product. Whatever the dog will eat, we'll sell it.” In an e-mail, MSSB spokesman Jim Wiggins refuted the criticism. Many of the industry's most successful advisers are Morgan Stanley veterans, he wrote. “Anyone who claims that their modus operandi is "product push' really has no understanding of Morgan Stanley's culture,” Mr. Wiggins wrote. “Our people are so successful because they do right by their clients.” After some last-minute negotiations, Citigroup last Tuesday agreed to sell its 49% stake in the MSSB joint venture over the next three years, based on a valuation of $13.5 billion, far below the $22 billion Citigroup said it thought the business was worth. Now that the acquisition terms have been worked out, Morgan Stanley is expected to turn up the heat to make the wealth management business as profitable as possible, given that other parts of the company have struggled. Indeed, MSSB management has laid out plans to generate more revenue from fee-based accounts and lending in an effort to reach a pretax profit margin of 20% — almost double the current level. For the moment, the chief complaints among Smith Barney brokers focus on the troubled workstations with which they have to contend. Problems came to a head this summer as the firm completed migration of its remaining Smith Barney advisers. MSSB management had promised an integrated platform incorporating the best from both firms. But that integration “has been botched,” said one MSSB adviser, who also asked not to be identified. “They're working on changes, but it's not obvious yet it's been fixed,” the adviser said. Mr. Wiggins acknowledged that there have been problems with the firm's technology, but he wrote that they are being addressed. “We are working through technology issues in a focused and systematic way,” he wrote. “This will be a superior platform, ultimately.” Meanwhile, as part of a larger costing-cutting plan, the firm recently cut the number of complexes and forced some managers into production.

CAUSING FRUSTRATION

That move has contributed to a centralized decision-making ap-proach that frustrates brokers and managers used to having local control, said Danny Sarch, founder of Leitner Sarch Consultants Ltd., a recruitment firm. The firm “will not get sustained margin growth” from the cuts, said Frank LaRosa, chief executive of Elite Recruiting & Consulting and a former MSSB manager. “It becomes counterproductive,” he said. “Whenever you do a merger of this size and complexity, some centralization is required initially as you combine policies and forge a new organizational structure,” Mr. Wiggins wrote. “We are now at a point where decision making will become more decentralized — particularly in matters that pertain directly to clients.” A symbolic change is coming at the end of this month when the Smith Barney brand is retired and the joint venture will begin operating under the new name of Morgan Stanley Wealth Management. Some observers think that will backfire. “That will be the nail in the coffin for the Smith Barney folks,” Mr. LaRosa said. To be sure, not all the firm's producers are unhappy. “I'm a huge Greg Fleming fan,” said another legacy Smith Barney broker, referring to MSSB's president. “He's got great people around him [and] I'm very positive” about the firm despite the challenges, said the broker, who asked not to be identified.

TOP COMPETITOR

And without question, MSSB remains a formidable competitor, with $1.7 trillion in assets and annualized revenue per representative of $775,000. As of the second quarter, the firm had 16,934 reps, down 6% from last year but neck and neck with Bank of America Merrill Lynch, with 17,500, which includes bank brokers. “The real frustration [with MSSB brokers] is that they don't have any options,” said Rick Peterson, head of an eponymous recruiting firm. Other wirehouses have their own problems and are more regimented than ever under bank ownership, he said. Mr. Peterson doesn't expect to see any increase in MSSB brokers' defecting for greener pastures. Mr. Sarch and Mr. LaRosa disagree. Although neither expects any type of mass exodus, they do anticipate more movement as retention deals are worked off early next year. “Every [business] model out there is taking more Morgan Stanley people,” Mr. Sarch said. “We don't call on any other brokers but MSSB people,” Mr. LaRosa said. “No others are as unhappy.” djamieson@investmentnews.com Twitter: @dvjamieson