Morgan Stanley gives subdued outlook for brokerage

NEW YORK Tue Oct 4, 2011 5:29pm EDT

NEW YORK (Reuters) - The head of Morgan Stanley's (MS.N) wealth management business offered a tempered outlook for profits and staff levels on Tuesday and acknowledged that achieving a 20 percent pretax operating margin depends largely on market conditions.

Greg Fleming, speaking at the Reuters Global Wealth Management Summit in New York, said management aims to achieve pretax operating margins in the mid-teens for the wealth management business over the next six to eight quarters.

That is higher than the 9.3 percent margin the business posted last quarter, but less than the 20 percent that Morgan Stanley Chief Executive James Gorman has said he expects the business to achieve over the long-term.

"It's clear there is frustration with margin and the pace of margin improvement," said Fleming.

While he still hopes to achieve a "20-plus" margin over the long term, Fleming said profitability beyond the mid-teens is largely dependent on market conditions, including higher interest rates and rising stock valuations.

His comments came on a volatile day for stocks, as the S&P 500 Index .SPX slid into bear market territory early in the day only to stage a late rally and close 2.3 percent higher.

Morgan Stanley shares hit a new multiyear low of $11.59 in early trading, then surged 12.3 percent to close the session at $14.01. The stock has been among the most sensitive to developments in the European crisis in recent weeks.

Morgan Stanley, the sixth-largest U.S. bank by assets, has been struggling to shore up investor confidence in its business strategy since announcing plans to acquire the Smith Barney franchise from Citigroup Inc (C.N) in 2009.

The division has produced lackluster results so far, due to high costs, historically low interest rates and market volatility that has pushed clients to the sidelines.

In recent weeks, investors have also become concerned about the bank's exposure to European sovereign debt and troubled Euro zone banks, particularly in France. On Monday, Gorman sent out a company-wide memo citing "an enormous amount of confusion and misinformation" about the bank and urging employees to ignore "the rumor of the day." (ID:nN1E7921ZO)

Fleming would not expand on what Gorman said in his note, but said he has been telling brokers to assist clients and improve results through this period of market stress.

"What I tell employees all the time is: focus on what you can control," said Fleming.

BIG TENT, FEWER ADVISERS

Combining the wealth management businesses of Morgan Stanley and Citi created a massive enterprise with the largest brokerage force and a long integration process that would take years to complete.

As the majority shareholder with 51 percent ownership, Morgan Stanley manages day-to-day operations and strategy. It has options to acquire the remaining stake in three portions through 2014 at market value.

Despite management's bullish statements on its prospects, Morgan Stanley Smith Barney has delivered lackluster results. Over the eight quarters ended June 30, the average pretax operating margin of Morgan Stanley's wealth management division was 9 percent.

Morgan Stanley has been laying off hundreds of underperforming brokers and working to reduce noncompensation costs to help boost margins. It is also starting to put all brokers on the same technology platform, a process that will continue through mid-2012, with eventual plans to reduce brick-and-mortar locations, to further winnow costs.

On Tuesday, Fleming emphasized that Morgan Stanley Smith Barney is not intent on being the largest brokerage in terms of financial adviser headcount. The bank's wealth management group had 17,638 advisers as of June 30 and executives have said staff levels may drop below a previously stated target of 17,500 to 18,500 advisers.

In addition to laying off underperforming brokers and being selective in its recruiting efforts, Fleming said Morgan Stanley has scaled back its adviser trainee program to 1,250 trainees per year from 1,750.

"We're not trying to run the business to have the largest number of FAs," Fleming said.

He also said there is no "cutoff" for financial advisers in terms of assets or number of clients, and that the bank does not plan to significantly reduce adviser headcount.

"We are going to be a major sizable player," said Fleming. "We are going to continue to provide a big tent for all of them to succeed."

Fleming, who knows Gorman from their time as executives at Merrill Lynch, joined Morgan Stanley in 2009 to run the bank's asset management business. He added the wealth management role to his title early this year and has been aggressively working to implement cost efficiencies since then.

Fleming's team has also been focused on growing revenue through managed accounts, building out lending capabilities and pushing the capital markets and wealth management businesses to work closely together to distribute investment products.

The operation plans to reduce costs by $80 million to $100 million per quarter as the integration process intensifies through 2013, Fleming said.

"We think over the medium term, three to five years, this is a very important business," said Fleming.

(Reporting by Lauren Tara LaCapra; editing by John Wallace and Matthew Lewis)