Private banking 2008: When the ultra-wealthy bump into the sub-prime
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"We’re happy to make necessary investments to experience growth, even if it means somewhat lower profitability, and so will certainly consider acquisitions"
James Gorman, Morgan Stanley |
When you arrived at Morgan Stanley from Merrill Lynch almost two years ago, the wealth management business had been neglected. What were the challenges that faced you?
There were certainly a lot of problems facing the wealth management business at the beginning of 2006. Little had been done to leverage the merger with Dean Witter in 1997 in terms of people or brand, yet there were clear opportunities to be had from having a retail business joined to an institutional business.
In addition, while other firms had readjusted their businesses after the bubble burst in 2001, Morgan Stanley had continued to have very poor financial performance. The quarter before I arrived, return on equity was just 1%, and pre-tax margin 1% for the business.
A lack of investment had meant that basic infrastructure was weak. Technology, operations, client reporting and compliance needed a total upgrade. Staff was also an issue. The management pool was not strong, as harsh as that sounds. And the number of financial advisers had got out of hand. In 2002, there were 14,000 financial advisers. That rate had been growing at 10% a year, which is far too high for such a large firm.
What made you think the business could be turned around?
Although those challenges sound monumental, fundamentally the business was good. On the positive side, this was Morgan Stanley, a huge and well-regarded brand. Secondly, the clients were much wealthier than anyone outside the firm, me included, realized. The asset base was certainly strong and could be built on. And, thirdly, among our ranks there were a lot of very talented financial advisers. I knew that if we could solve the problems the business was facing, then those strengths would shine through. And I believed the problems were surmountable.
How did you go about implementing change?
The first six months was the real turnaround. We wanted to act fast, and above all give the business and its employees energy and self-belief by focusing on real strengths.
Before I arrived John Mack and Zoe Cruz had already cut 1,000 financial adviser roles, and I cut a further 500. Of the top 30 positions, we changed 25, and we brought in a new CFO with whom I set up measurable financial goals over three to five years. We also invested heavily in technology and infrastructure, and cleared up legal issues that were hanging over the business and affecting the reputation. From this foundation, we could then focus on future growth.
What did you feel to be key to creating a successful private bank?
Improving the products and solutions we can offer clients was certainly key. Many of our clients are effectively small institutions in terms of their needs. The assets under management from clients with $10 million-plus has increased by over $60 billion since the beginning of 2006. They want sophisticated and innovative investment opportunities and solutions. We immediately set about building our middle-market expertise, restructuring our trust company, working with the capital markets side on new structured products, and established a formal referral process for clients needing investment banking services such as M&A.
What about in alternative investments?
We brought in a new head of alternative investments who has led a dramatic expansion in our offerings. Morgan Stanley has expertise in structured products, currencies, commodities, private equity and hedge funds, and we have a $50 billion real estate portfolio, for example. Very few firms have those capabilities on a global basis, and wealthy clients want to be presented with those opportunities.
Have the hedge fund acquisitions by Morgan Stanley helped attract clients?
Yes. We can offer our clients access to these top-quality funds. Furthermore, the relationships we have built with these hedge fund managers are beneficial for our asset management business as a whole. Several of the Frontpoint Partners’ senior executives are now in leadership roles within Morgan Stanley Investment Management. It brings the client access to product and to talent.
Over your tenure at Morgan Stanley, the productivity of financial advisers has significantly increased. How have you achieved this?
Quite simply by increasing revenues per financial adviser through expanded product offerings and by reducing headcount of unproductive personnel. Productivity per financial adviser is now $817,000. At the beginning of 2006, this was $560,000 and in 2002 it was $324,000.
Although you initially made staff cuts, you have since been hiring. Has this been difficult?
We’ve hired people to look at recruitment, and have different revenue initiatives now to attract people. We’ve hired over 600 experienced financial advisers this year and our turnover of top-two-quintile producers has remained stable. We’ve created an attractive business to work for.
Part of your strategy has been to focus on building up the international business. Are you succeeding?
Morgan Stanley is a global brand and a leader in investment banking. That quality can be leveraged. Furthermore, the sheer amount of wealth in the world is expanding dramatically, particularly internationally. Even if it is a case of just having a handful of advisers in a region, it can offer tremendous growth opportunities. We relaunched the Latin American business, made several hires there and opened an office in Miami dedicated to serving this market, and we will continue to expand there.
We serve northern Asia and China out of Hong Kong and southern Asia out of Singapore, and the region as a whole is growing tremendously. Revenues in Asia are up over 80% and in China over 270%.
In Europe we hired a new head and have teams focused on the Middle East and Russia. We are refocusing our European business on the ultra-high-net-worth segment, which is why we divested Quliters in the UK, which is a mass-affluent business.
Building a Swiss bank has also been a priority. Why is that?