In the Battle of the Big Brokers, Merrill Is Winning

Morgan Stanley has more advisers, but they bring in less profit

By Michael J. Moore and David Mildenberg

The financial crisis shook up the brokerage landscape. Bank of America (BAC) acquired industry leader Merrill Lynch (MS) in 2009. That same year, Morgan Stanley (MS) jumped from fifth largest by client assets to first when it bought a controlling stake in a venture with Citigroup's (C) Smith Barney. Now, Merrill Lynch and Morgan Stanley Smith Barney are engaged in one of the more intense rivalries on Wall Street. To make things more interesting, former Smith Barney head Sallie Krawcheck is leading Merrill's charge, and former Merrill brokerage chief James P. Gorman is running Morgan Stanley.

Merrill Lynch has emerged with a clear edge: In the first half of this year it produced $315 million more profit from its brokerage than Morgan Stanley, according to company filings, and did so with 2,900 fewer financial advisers. Its pretax profit margin, 16.7 percent for the same period, is more than double Morgan Stanley's 7.8 percent.

Merrill's superior results stem from a smooth integration with Bank of America, analysts say, and being more effective at selling additional products to brokerage clients. "Merrill Lynch long ago led in banking, financial planning, insurance, and they are the more diversified firm," says Charles Roame, managing principal of Tiburon Strategic Advisors, a consulting firm in Tiburon, Calif. "It will win the banking-integration bet. Morgan Stanley will not catch them."

The job of catching up falls to Gorman, 52. An Australian, he joined Merrill Lynch in 1999 from consulting firm McKinsey and was named to lead a restructuring of Merrill's famed "thundering herd" in 2001. He cut the number of brokers by one-third over two years, closed a quarter of the firm's retail branches, and shifted its focus to the wealthiest clients before leaving the company in 2005. His track record gives investors and brokers confidence that he will improve Morgan Stanley Smith Barney's performance, analysts and industry executives say, as he competes with a company still benefiting from the strategy he devised.

Gorman, who joined Morgan Stanley in 2006 and became chief executive in January, declined to comment. A Morgan spokesman, Jim Wiggins, says the firm likes its position. "There are great synergies with our institutional businesses, and we have a clear, multiyear plan to grow the profit margin," he says.

Gorman's chief rival is Krawcheck, 45, who oversees Merrill Lynch as president of Bank of America's wealth unit. Krawcheck, who grew up in Charleston, S.C., is going head to head with Smith Barney, which she led from 2002 to 2004 and in 2008 when she worked for Citigroup. "We've got the leadership position, but we can't rest," Krawcheck said in an e-mail. "Staying focused on the clients, meeting the needs and demands that have come out of the downturn, and leveraging the competitive advantages of Bank of America will keep us ahead."

Based in New York, Krawcheck has long been one of the most prominent women on Wall Street. She has kept a low profile at Bank of America, says Mindy Diamond, president of Diamond Consultants, a Chester (N.J.) executive search firm for the brokerage industry. "We talk to zillions of Merrill advisers all the time, and her name never comes up," Diamond says. "It's very different at Morgan Stanley, where Gorman absolutely has a rock-star advantage. Many advisers are staying there because they respect him so much."

The firms manage about the same amount of client assets—$1.4 trillion at Merrill, compared with $1.5 trillion at Morgan Stanley—and have comparable revenue: $6.4 billion in the first half at Merrill and $6.2 billion at its competitor. Yet Merrill earned $675 million from its brokerage in the first half, while Morgan Stanley Smith Barney made $360 million. On average, each of Merrill's 15,142 brokers brought in $836,000 on an annualized basis compared with $682,000 for Morgan Stanley's 18,087.

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