Fleming opens Morgan Stanley's wallet

NEW YORK Tue Jun 4, 2013 5:33pm EDT

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NEW YORK (Reuters) - Greg Fleming has taken his foot off the brake and put it on the gas pedal as he pushes to generate more profit from Morgan Stanley's army of brokers.

Fleming, who runs wealth management and asset management at the world's biggest brokerage firm as measured by its more than 16,000 brokers, said the days of creating respectable profit margins through strenuous cost-cutting are over.

"We feel good about the different ways we can enhance business going forward," Fleming said on Tuesday at the Reuters Global Wealth Management Summit. "We are driving growth and the top line rather than primarily on the expense side of the equation."

Morgan Stanley Chief Executive James Gorman has made a bigger bet on selling financial products and services to wealthy investors than the head of any other major U.S. investment bank, spending some $13.5 billion to acquire Smith Barney in stages from Citigroup Inc. He recruited his former Merrill Lynch colleague, Fleming, 50, to run asset management in February 2010 and added wealth to his portfolio a year later.

But progress was slowed by problems integrating the technologies of the two firms and by the hangover from the 2008 financial crisis, which eroded investors' trust.

Fleming, a former investment banker who was paid $8.6 million last year, spent 18 months focused on cutting training classes, broker "recognition" trips to fancy resorts and other perks to hit his goal of doubling the retail brokerage unit's profit margins by mid-2013.

He beat his deadline. Morgan Stanley Wealth Management delivered a pretax margin of 17 percent in this year's first quarter and contributed about 41 percent of the company's total revenue.

Fleming on Tuesday declined to guarantee he can maintain the margin through the rest of the year or to forecast if and when the firm will hit the 20 percent target initially set by Gorman. But he enthusiastically outlined three business strategies and a plan to spend $500 million on technology by the middle of next year that he said will promote growth through spending.

At the top of his strategic list is catching up with competitors such as Bank of America Corp's Merrill Lynch and Wells Fargo & Co's Wells Fargo Advisors in having brokers sell mortgages, loans and other bank products to wealthy clients.

Morgan Stanley plans to dip into that vast technology budget to make it easier for clients to open bank accounts and to make transactions online and through mobile devices, Fleming said.

He admits he has a long way to go. Morgan Stanley's net interest income from loans is two to three times smaller than large competitors. But lending has almost doubled from an admittedly low base two years ago, propelled by training and compensation incentives, he said.

Almost 90 percent of the firm's top brokers measured by revenue now sell bank products, Fleming said. Loans collateralized by stocks and other investments in clients' portfolios are the fastest-growing product.

Less than 10 percent of Morgan Stanley clients, however, are borrowing - a handicap Fleming presents as a "significant opportunity" if advisers who were weaned on selling investments for commissions can be trained to accept fees for offering advice on bank products. The firm expects to have about $130 billion of low-cost deposits in its bank subsidiary by year-end to fund lending, Fleming said.

Fleming's second big strategic push is to capitalize on Smith Barney's prowess as a master curator of funds - picking mutual funds, hedge funds and other "managed account" products for their clients. "We are investing to maintain our market leadership there," he said.

Clients pay fees to their brokers for allocating assets to such products, and also to the outside managers of the funds in the packaged products, but Fleming said managed accounts benefit the firm, advisers and clients.

Morgan Stanley's third strategic push is into raising money through bond and stock offerings and offering merger and acquisition advice to the businesses of its wealthy clients. Bringing capital markets to the wealthy investor's adviser is a faddish - as well as lucrative - initiative that was also cited at this week's summit by the top wealth and private banking executives at UBS and Wells Fargo.

Eric Benedict, the former head of Morgan Stanley's institutional stock sales desk, has moved to its wealth management headquarters in Purchase, New York, and brought the bank's middle-market fixed-income division with him to help sell their wares through the brokers. David Heaton, a former Merrill colleague who was running Morgan Stanley's asset management investment banking deals, also is working in wealth management to coordinate the capital markets introductions.

Fleming wouldn't give numbers but said the firm is "already seeing nice growth in the business."

The push into lending and corporate finance carries some risk for Morgan Stanley and other big brokers as regulators step up their scrutiny of cross-sold products from banks. "Cross-selling requires supervision," Richard Ketchum, chief executive of the Financial Industry Regulatory Authority, said at the summit on Tuesday. "When you add on top of that compensation incentives, it worries me."

Morgan Stanley "does the right thing for the individual client based on risk-return profiles," said Fleming, an industry representative on FINRA's board. "With almost 4 million clients, it's quite a challenge."

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(Reporting by Jed Horowitz and David Randall; Editing by Lauren Young and Chris Reese)

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