Morgan Stanley: Trading Sideways - 'ZIFFPAGE TITLESystems Check '

Internally, John Mack started talking to his troops about their technology problems as soon as he took the helm last summer. "He was on our in-house broadcast system several times, mentioning the technology lag in retail, and the need to coordinate the different parts of the company," says one former broker.

Some changes were already in the works for the beleaguered business, having been initiated under Purcell and his retail chief, John Schaefer. In the last six months, for example, Morgan Stanley has rolled out a new tax-reporting package for the 2005 tax year.

Previously, customers had to pick through a confusing maze of figures and add up gains and losses on their year-end reports, while reports from rivals such as Merrill Lynch were clear and packed with relevant information. The new Morgan Stanley system combines tax-form 1099 gains and losses, and allows users to download information from the client Web site into popular tax programs. More improvements to reporting statements are expected for the current tax year.

Brokers have also seen improvements to those balky, old desktop workstations, including more integration of information at the back end to provide more consolidated client data on-screen.

A company spokeswoman identifies the desktop and supporting systems as an area of further investment to come, including a series of steps that will ultimately allow brokers a complete view of client account data, such as transaction history, contacts with the firm, and performance available in one place. Rolling out the full range of features—which are already available at some major competitors—is expected to be a multiyear process.

This is not easy work. "There is more to the problem than just overcoming the previous carelessness by Morgan Stanley management," says Doyle. "The challenges are not insignificant in creating consistent data across systems. There are big, hairy problems. Merrill Lynch has dumped more than a billion into a new workstation for its brokers, and it's not done yet, with the project way overdue."

There are also strategic questions on spending priorities for financial services companies, says David Schehr, a Gartner Inc. analyst. "Within the industry there is a lot of disagreement on where to spend the money. Merrill Lynch is spending a lot on its broker workstations, while firms such as Etrade, Fidelity and Ameritrade are focused more directly on interaction with the end client."

In a perverse way, Morgan Stanley is shielded from some of these concerns, because it pretty much has to spend money everywhere. Thus it is also promising improvements to its client Web site, which is scheduled for a face-lift in May of this year. This has been an area of particular weakness for Morgan Stanley, says Doyle.

"What they have available online for customers is a throwback to the Clinton administration. They are way behind Merrill Lynch, and Merrill Lynch pales in comparison to Fidelity and Etrade." Doyle is skeptical of Morgan Stanley's ability to do much about its online product in the near term.

Like other firms, Morgan Stanley has shifted its emphasis to wealthier clients, pushing smaller investors to call-center service and reserving broker time for portfolios of $100,000 or more (see Follow the Money).

But perhaps surprisingly, these high-dollar investors are the ones who demand good Internet service—they aren't content to leave everything to their doting financial advisors. "Millionaire customers, the ones they want, are the most active investors online," Doyle says. "And they are the most likely to go online to track holdings. This is a clarion call to Gorman's guys—you can't just assume your best customers will defer on this stuff."

Gorman faces issues beyond technology, too. Not least is the problem of mollifying brokers who have grown used to a climate of uncertainty and privation. Morgan Stanley has axed about 1,000 low-producing brokers, but the good ones have been leaving of their own volition. Chief Financial Officer David Sidwell has said that the firm lost more "seasoned productive brokers" than it could hire in 2005, reducing client assets by a net of $8 billion. The total headcount is now about 9,000 brokers, down almost 1,500 in the last year. And Sidwell has said that the year-end number is expected to be about 8,600.

Gorman has adjusted compensation and expense accounts for brokers in recent months, but the bleeding has not stopped. "People in retail sales are convinced this guy Gorman is going to do something to hurt them," says Punk, Ziegel's Bove. "He has to calm everyone down."

Technology is just one piece of this daunting puzzle. But it is an important piece. Another former broker, who has since left Morgan Stanley for a major competitor, says, "It's a competitive disadvantage, without a doubt. It seems like so much time and energy were focused on infighting that competitiveness has fallen off the radar."

With more than $600 billion in client assets, the retail brokerage business remains a potential goldmine for Morgan Stanley. Fixing it is going to be an enormous challenge, one that many analysts think is too expensive and difficult to undertake. But CEO John Mack, perhaps eyeing the comeback of the Initial Public Offering business, seems to be staking his future on retail's revival.

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Morgan Stanley: Trading Sideways

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