James Gorman leaves an enviable legacy
A wealth manager, who came into a legendary but unstable global investment bank and transformed it, hands on a very different and much better firm.
The best thing Morgan Stanley’s staff and investors can hope for now is that James Gorman’s tenure as executive chairman, starting on January 1, 2024, will be short.
It is a tradition that always looks odd to European eyes, though goodness knows why.
The former chief executive and chairman gives way to a new CEO but stays on to support and guide the new person – and keep an eye on them – through any early difficulties before they also take the title of chairman.
No guarantees, but Ted Pick, who has been at the firm since 1990, should be OK.
The main reason to hope Gorman, one of the great leaders of any Wall Street firm, does not stay too long is that it will show he – and Morgan Stanley’s board – got the last big call right.
Gorman has been as painstaking in preparing his own succession as in every other aspect of running Morgan Stanley since being asked to take over from John Mack in September 2009.
Those were dark days. Gorman had joined Morgan Stanley in 2006 to run wealth management, as he had at Merrill Lynch. He walked into a firm still traumatized by years of bitter infighting between managers from two sides of the firm’s ill-fated 1997 merger with Dean Witter Discover.
That came to a form of resolution with the ouster of Phil Purcell in 2005 and Mack’s rise to the top, just in time for the firm to dive into sub-prime.
Through the turmoil
The firm came within days, perhaps hours, of collapse in the global financial crisis. JPMorgan didn’t have to buy it and nor did US taxpayers, but only hefty investments from China Investment Corp in 2007 and from Japan’s MUFG in 2008 kept Morgan Stanley going.
While equity capital markets head Pick was helping the firm raise the capital it needed to survive the immediate crisis, Gorman looked through the turmoil and saw a chance to re-invent the firm for decades to come.
Wealth management in those days was a low-margin, volatile and somewhat disreputable brokerage business in which too many financial advisers saw their best way to get paid being to churn clients’ money through often unsuitable investments to generate transaction charges for clients, revenue for their firms and bonuses for themselves.
Gorman had a different vision: better management would ensure financial advisers put client interests first; those clients would keep money at the firm so it would grow volumes. And, by investing in the technology needed in an increasingly complex business and eventually operating it at scale, winning firms would then also improve margins.
Does all that sound a bit soft?
In recent years, Gorman has sometimes adopted a cosier public image as the leader of a prominent firm. But don’t be fooled. The Australian and former McKinsey consultant can be as hard as nails.
When he joined Morgan Stanley, it had 10,000 financial advisers and a mass of legal claims over suitability. Gorman, like Pick, loves deep analysis. This showed those legal headaches mostly came from a cohort of low-end advisers.
He fired 2,000 of them.
While Pick was helping the firm raise the capital it needed to survive the GFC, Gorman looked through the turmoil and saw a chance to re-invent the firm for decades to come
“People saw it as us losing 2,000 advisers,” Gorman told Euromoney. “We saw it as firing several hundred million dollars of legal problems.”
Gorman could scarcely believe his luck that Citigroup, which had to be bailed out in the GFC, was now forced to sell Smith Barney, the biggest rival to the famous thundering herd he had once led at Merrill Lynch.
He seized the chance, not caring if he had to acquire the whole thing piecemeal over several years or if it took a long time to transition the new advisers onto the firm’s systems.
It gave birth to an image that will still define the firm many years from now. The investment bank, where Pick has spent his career both in banking and in building and rebuilding markets businesses, is the firm’s engine. The wealth management business, which now reports to Pick, and which Gorman built, is the ballast.
The ballast has been pretty powerful for a while now.
Gorman didn’t just stop at Smith Barney. He convinced the board to add more acquisitions, including Solium, a manager of corporate stock plans that brings clients to the firm from their workplaces, and E*Trade, an electronic brokerage that added several million self-directed investors who might aspire to be clients of the firm’s advisers.
He also acquired Eaton Vance for the firm’s institutional investment management business.
When the firm announced third-quarter 2023 earnings, wealth management had brought in $19.6 billion of revenues over the first nine months of this year – up 10% on the same period in 2022 – with a return on average tangible common equity of 35% and, perhaps most remarkable, a pre-tax profit margin of 26%.
When Gorman joined, this was a low single-digit margin business. It would be lucky to generate 5%. It could be 3%.
The comparison between his vision to diversify Morgan Stanley and his ability to execute and what has been happening at the other great investment bank, Goldman Sachs, ensures Gorman will be remembered for a long time on Wall Street when he finally departs.
The firm’s three businesses – investment banking and markets, wealth management and investment management – are sufficiently distinct to promise a mix of earnings growth and stability.
But they are close enough to be manageable. They depend on markets that Pick knows inside and out.
Managing the wealth and investment management side is all about culture and egos, just like investment banking.
If Pick needs counsel on any of that, he can always ask the executive chairman – for a while, at least.