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In the Battle of the Big Brokers, Merrill Is Winning


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

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.

The large size of Merrill Lynch compared with Bank of America's brokerage unit made combining forces easier than at Morgan Stanley, which had to integrate two similarly sized operations with a lot of overlap, says Guy Manuel, founding partner of CBM Group, a New York consulting firm. Merrill Lynch had 16,000 brokers in September 2008 when its sale was announced. Charlotte (N.C.)-based Bank of America had about 2,000.

Morgan Stanley's absorption of Smith Barney "is probably not going as well as they originally thought," says Douglas Sipkin, a New York-based analyst at Ticonderoga Securities. Gorman said in February that the brokerage would have $450 million in integration costs this year, after $280 million in 2009. He said he expects a minimum of $1.1 billion in cost savings at the unit by 2011.

Merrill Lynch also has a lead in cross-selling. It has 800 bankers assigned to persuade brokerage clients to take out a mortgage from or move money to Bank of America, the largest U.S. lender by assets, resulting in 80,000 sales of banking products in the second quarter compared with 35,000 in all of 2009, according to a regulatory filing. "There's more of a natural referral flow at Bank of America and Merrill Lynch," says Douglas G. Ciocca, managing director at Renaissance Financial in Leawood, Kan., which manages $2 billion.

To close the cross-selling gap, Morgan Stanley hired 100 bankers to offer loans and deposit products to brokerage clients. The unit may quintuple its ranks by the end of 2011, a person with knowledge of the strategy says.

There may be more at stake in the broker battle for Morgan Stanley, which got 36 percent of first-half net revenue from wealth management, than for Bank of America, which relied on the Merrill Lynch brokerage for 10 percent of net revenue. Yet neither company can afford to slip. Wells Fargo (WFC), the third-largest full-service U.S. brokerage and a leader in cross-selling, has almost as many brokers as Merrill and oversees $1.2 trillion in client assets.

Merrill, Morgan Stanley, and Smith Barney controlled 25 percent of the industry assets under management in 2009, down from 32 percent in 2007, figures compiled by Cerulli Associates show. Independent advisers and regional broker-dealers have increased their percentage of assets to 32 percent from 28 percent in 2007. "Competing in this world is much different than it was in the 1980s and the 1990s," says Anthony DeChellis, head of Credit Suisse Group's (CS) private banking Americas business. "Clients are getting better at choosing the firms where they can get the best advice and the best guidance."

The bottom line: Merrill Lynch earns higher profits with fewer advisers, thanks to a smooth integration with Bank of America and more cross-selling.


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