Morgan Stanley starts to climb mountain to riches

Date: Friday, April 27, 2007
Author: Mike Foster, Financial News Online US

Executives and advisers have been hired in an attempt to turn round high net worth business

Things are looking up for Morgan Stanley’s wealth management business after a string of impressive hires by chief executive John Mack.

The initial cause for optimism came last year – with the appointment of Merrill Lynch’s James Gorman as head of wealth.

Around the same time, the group hired Alexander Classen as wealth head of Europe and the Middle East. Over the past 12 months, his division has hired 20 advisers, including several from his former employer, Goldman Sachs.

Goldman staff, it is said, find it hard to contain their irritation, no doubt to Mack’s satisfaction.

But Gorman, a former McKinsey consultant, knew he faced a challenge to turn round the fortunes of the operation. Although its gross margins have been reasonable, high costs had left it trailing its peers in terms of pre-tax margins and revenues per adviser.

Gorman acted without delay. He culled his least effective US staff and rewarded top producers. “You’ve got to be brutal by defining the bottom half of your organisation,” he said.

More resources have been put behind global operations to generate clients worth $5m (€3.7m) or more. First-quarter profits this year showed a healthy increase. Six senior wealth advisers have just been hired from Citigroup’s Smith Barney unit.

One broking analyst said Morgan Stanley’s wealth brand lacked the international clout of UBS and Credit Suisse, but added it is travelling in the right direction.

Classen said: “We used to be sub-scale in Europe but we’re addressing the situation. I would expect to hire another 20 to 25 advisers by early next year to take the total to more than 100.”

The Goldman hires include François Andriot, who is in charge of Morgan Stanley’s Swiss office and his lieutenant, Anthony Hanna. “I wanted a more entrepreneurial and dynamic platform in Switzerland,” said Geneva-born Classen.

He also helped to hire 10 Latin American advisers from Goldman. More recently, he recruited Beach Seakins from UBS as London-based adviser to wealthy Russians. “We’re glad to have him,” said Classen. “We have recently expanded our Russian operation from one to five.”

A headhunter said Morgan Stanley has offered top advisers a generous 30% share of revenues they generate. Classen declined to confirm the figure, saying that every package was different.

He said: “We aim to offer incentives, related to factors such as revenue and growth in assets, which encourage advisers to transfer and build their books of business, and help recruits make the transition.”

Classen added that recruits, at every level, gain access to mentors. Individuals are compensated for the help they give newcomers. He accepted that advisers will always want their own books of business but added: “We are genuinely keen to develop a team culture.”

One headhunter said: “Morgan Stanley probably isn’t the kind of place for someone who wants experience in traditional private banking. But its reputation is improving. Entrepreneurial individuals, and those with a strong reputation, would find its level of compensation attractive.”

Morgan Stanley recently sold its Quilter private client arm to Citigroup because its clients, in the main, were not sufficiently rich. But Classen stressed Morgan Stanley would take a view on joint ventures or acquisitions in regions where access was hard to develop organically.

He has backed the purchase of a majority stake in a joint venture with Saudi Arabian investment bank the Capital Group. This will spawn a wealth operation under Morgan Stanley’s name.

Morgan Stanley already operates from Dubai and Qatar: “But Saudi Arabia has 50% of the wealth in the Middle East, and we needed to enter that key market,” he said.

One of Classen’s priorities has been to find a way of securing clients through Morgan Stanley’s investment bankers because they deal with wealthy individuals when winning deals.

In-house client transfer is notoriously difficult to achieve. But Classen said: “We have formalised referral agreements through which bankers are offered meaningful sums of money on top of their regular bonus when we win clients through them.”

This can work the other way round. Classen said: “We are working together to advise on small- and mid-cap transactions in places such as France and Italy.”

The sums concentrated in the hands of first-generation entrepreneurs suggests this initiative has some way to go. Apart from advising on deals, Morgan Stanley is keen to put together funding.

To boost his investment service, Classen recently recruited Paul Marson as chief investment officer. Marson was previously head of investments for Europe and the Middle East at Goldman Sachs’ wealth division.

Classen said: “I know Paul well. He is someone who has traction with his clients and applies creative thinking to investment decisions.”

Marson has been working at Morgan Stanley for a month. He is reshaping its offering, made available through 30 investment professionals. Several areas, including quantitative investment products, will be boosted.

Classen is philosophical about the recent loss of Ravi Bulchandani, his head of alternatives, to Barclays Wealth. “He has taken a position as head of global alternatives. We wish him well,” he said.

In line with Gorman’s thinking, Classen wants to work more closely with Morgan Stanley’s retail and institutional asset management arm. Consultants say this division has seen better days – but Morgan Stanley has just appointed James Dilworth to turn the business round in Europe. Dilworth used to work for Goldman Sachs Asset Management. “A great coincidence,” said Classen.

Wealthy individuals are often attracted to Morgan Stanley to gain access to its real estate, private equity and capital markets products. Classen said: “We also want to offer more opportunities for our clients to co-invest with us.”

The wealth division offers its clients access to single strategy hedge funds or funds of funds, which it vets through its Graystone advisory arm.

Classen can also provide access to hedge funds, such as Lansdowne and Avenue Capital, recently staked out by Stuart Bohart’s alternatives division.

But Classen stressed that Morgan Stanley also provides access to third-party products: “These provide a high percentage of client funds.” He said his top priority remains achieving scale throughout Europe and the Middle East. “There’s a war for talent out there,” he said. “We want to make sure we come out on top.”