When Euromoney sits down with James Gorman, chairman and chief executive of Morgan Stanley, it is the day after the firm’s anniversary dinner for present and past executives, marking 10 years since the financial crash.
“We went to the abyss, stared at it and were able to beat it back,” he says. “There is no one on this management team who would let us get near that again.”
It is not hard to believe. Gorman thinks strategically, with such close analysis and attention to detail that he finds problems and opportunities long before others do. And he discovered back in the 1990s that wealth management was far more valuable than Wall Street executives gave it credit for.
He saw it could be a high-margin business and one that offered stability to revenue streams, and he knew how to get there.
Looking at wealth management over the last 50 years, Gorman is effectively its rainmaker. His acumen led him from McKinsey to president of global private clients at Merrill Lynch, to president and COO of the global wealth management group of Morgan Stanley and now the firm’s chief executive.
It was his years at McKinsey that gave him the insights that would shape his future and that of the industry. As a senior partner in the financial services business at the consultancy, Gorman spent two years traveling the US to spend time in branches. Three months in Atlanta, Milwaukee, Boston, Detroit, Chicago, Los Angeles, Little Rock and the list goes on.
He walked away from the experience with some key findings. Firstly he saw that “high-quality professional management made a difference to the quality of service, to staff and client retention rates, to managing expenses or handling suitability issues.”
Indeed, after his deep dive into branches, Gorman wrote a paper he remembers being called ‘The manager is the magic’. It doesn’t sound ground-breaking, but in an industry that relied more on intuition than analysis, it was.
When he joined Morgan Stanley, for example, he quickly set about ensuring management was indeed up to par. An internal audit of 400 branches showed 90% were scoring ‘less than satisfactory’ or below for overall service.
“Managers were told they would be personally fined $100,000 if they didn’t improve before the next audit and, if it happened twice, they would be fired,” says Gorman.
Within two years, 97% of the branches were scoring satisfactory and above.
His experience on the road also showed him that it paid to be a consolidator in a consolidating industry. Gorman is perhaps the biggest proponent and exemplar of why scale wins in wealth management.
The financial crisis provided him with the opportunity he had been waiting for at Morgan Stanley – the acquisition of Smith Barney from Citigroup. Less than a month after Morgan Stanley’s stock had hit its all-time low, raising questions about its survival, the bank approached Citi to make the largest wealth management acquisition in history.
“The markets were still in turmoil, but we never lost sight of the strategic objective. You don’t get many windows, so when one opens, even if it’s inconvenient and even if you might pay 10% more or less, you have to act.”
It turned out to be a very good deal.
Gorman says there is a difference between opportunism and conviction. He points out that while outsiders were anxious about the slow pace of integration, he was unfazed.
“We moved 42,000 people from three systems onto one, and people were concerned if it took a 24 or 36 months. I could not have cared – I was planning for a 50-year time period.”
Capital markets, trading, investment advisory – that’s the growth engine – and wealth management provides us with a ballast- James Gorman
On his 1990s travels Gorman also saw wealth management was becoming an increasingly complicated industry that required sophisticated controls and that technology (which was expensive at the time) was crucial and had to be married to advice.
What Gorman also understood was that wealth management rides on reputation and client care.
“Once strategy is in place, it is always about the culture then, because the real problems come from not looking after clients appropriately. People have to have a visceral understanding of what is acceptable and what is not – even if it means leaving business behind – and of the importance of constant oversight and care. You can’t be arrogant about this.”
When he joined Morgan Stanley, for example, it had 10,000 advisers with a mass of legal expenses related to suitability. Deeper analysis showed the legal headaches to be focused among low-end producers, so he fired 2,000 advisers.
“People saw it as us losing 2,000 advisors, we saw it as firing several hundred million dollars of legal problems.”
Taking everything he had observed and applying it, Gorman says he knew he could not only drive up margins but drive up margins on much higher levels of revenues. That conviction was correct.
When Gorman joined Morgan Stanley, margins in the wealth management business were 3% on $5 billion of revenues. They are now north of 25% on $16 billion of revenues.
“I never imagined they could go beyond 20%,” he says.
Assets under management have almost tripled, from $686 billion when Gorman joined Morgan Stanley in 2006 to $2.3 trillion at the end of 2018.
Through his success, Gorman has put wealth management firmly on the radar of all financial services firms. He has shown the stability of what was perceived to be a boring business to be complementary to investment banking. Morgan Stanley’s revenue split between the two businesses is even.
“Capital markets, trading, investment advisory – that’s the growth engine – and wealth management provides us with a ballast,” he says.
“Trading can be all over the map. M&A deals can be pushed back. IPO pipelines can go from 10 to zero. But people are still buying and selling stocks and bonds, creating liquidity, looking to solve inheritance challenges and put kids through college.
“The beauty of three million relationships is that they don’t all do the same thing on the same day. Even on a day when the market is closed, we can make $65 million in wealth management because life goes on.”