Morgan Stanley: Trading Sideways

By Edward Cone  |  Posted 04-04-2006

Morgan Stanley: Trading Sideways

It was yet another Saturday in the office for Robert, a broker at one of Wall Street's most storied firms, Morgan Stanley. The simple job of printing out a portfolio summary for a client meeting was too much for the creaky computer system in his office to bear during regular working hours.

"It got clogged if two people were printing at the same time," says Robert (who chose not to use his real name for this article). So there he was on a sunny morning in the fall of 2005, hoping his antiquated desktop terminal wouldn't crash before it spit out a black-and-white account summary. A color printout remained beyond his reach: There wasn't a single color printer in the office.

Like thousands of other Morgan Stanley brokers, Robert was used to the lack of technology support. "I had not gotten a new PC in years," he says. Despite the fact that he was one of the company's top producers, dealing with sought-after high-net-worth clients, he couldn't provide those clients with real-time stock quotes, or transaction histories, without moving from one application to another; the company's key customer-data system, known as the host system, provided day-old information.

Meanwhile, he'd grown accustomed to customer complaints about the outmoded client Web site and information-poor year-end tax reports.

Nearly a decade after the 1997 merger of investment-banking powerhouse Morgan Stanley Group Inc. and retail brokerage Dean Witter Discover & Co., says Robert, "They are still separate firms, tech-wise. The merger was never completed in terms of technology. The retail brokerage has a platform, the institutional brokerage has another platform. Even employee systems aren't integrated. If I had switched to another part of the company, they wouldn't have known I existed. We had multiple passwords with different logic behind each of them."

Finally, around the turn of the New Year, Robert did what many of his fellow Morgan Stanley brokers have done in recent years: He left the firm for a rival, taking many of his high-value customers with him.

It would be an overstatement to say that Robert, or the hundreds of other brokers who have defected from Morgan Stanley, jumped ship solely because of the inadequate technology provided them, just as it would be simplistic to blame the firm's floundering retail operations on lousy computer systems.

At Morgan Stanley, the technology problems are as much a symptom as a disease. But inadequate technology is something that has routinely frustrated brokers and clients, and it is surely part of the retail brokerage's current malaise.

Morgan Stanley's first quarter earnings, reported in late March, were strong, but retail was once again the laggard. The company made $1.6 billion, versus $1.4 billion for the same period last year, on revenue of $8.5 billion, a 24 percent jump over last year's first quarter revenue of $6.8 billion.

But retail brokerage profits were down over 90 percent (after a special charge), reflecting the exodus of almost 1,500 brokers since last year and renewing analyst calls to sell the troubled division.

"The retail brokerage business there is not well, not nearly as healthy as it is at other firms, and technology is a big driver of that business," says Bill Doyle, a principal analyst with Forrester Research Inc. "It's not the thing that drives your people out, but it is absolutely a contributing factor. It's tough to do business there, given the continuing lack of investment."

Now, though, Morgan Stanley says it is moving to cure its ailing retail operations—recently renamed the Global Wealth Management Group—with a regimen that includes a serious upgrade to its technology systems. And the firm is putting some real money behind the initiative: The technology and operations budget for the retail business is over $500 million for 2006, which the firm says represents an increase; it declined to offer further specifics.

"We are committed to investing in technology to support the Global Wealth Management Group," says Eileen Murray, who joined the firm in October of last year as head of Global Operations and Technology, a job that includes overseeing all upgrades to retail systems. "We expect to make substantial improvements to our platform over the next couple of years. These improvements will ultimately help our financial advisors better serve our clients, while also helping our clients better manage their relationship with us."

Murray reports directly to Chief Executive John Mack, who returned to Morgan Stanley last summer after former headman Philip Purcell was ousted in a bitter civil war over the firm's performance, culture and direction. Murray is a trusted lieutenant of Mack's, having previously worked with him in a similar tech-leadership capacity at Credit Suisse First Boston, and during an earlier stint at Morgan Stanley. None of these proposed changes will happen overnight, as Morgan Stanley executives have stressed repeatedly. Said Mack at a November investor conference, "It takes two to three years to get the retail business where we think it needs to be, delivering a 20 percent margin. But we know what needs to be fixed."

Knowing what needs to be fixed, though, is not the same as fixing it. Morgan Stanley seems serious about addressing its retail technology gap, but it has a long, hard and expensive road ahead.

Story Guide:
Morgan Stanley: Trading Sideways

  • The Road to Perdition
  • Systems Check
  • Follow the Money
  • Return on Noninvestment at Morgan Stanley

    See Also:
  • Austin Adams—JP Morgan Chase CIO and Prominent "Opponent" of Offshoring—Isn't
  • How to Make Mergers Work: Avnet Tries Buying Its Way to the Top
  • CIOInsight Customer Service Survey: Can You Profit as Customers Get Smarter?

    ZIFFPAGE TITLEThe Road to Perdition


    The Road to Perdition

    Mack has steadfastly rejected calls to sell the troubled brokerage unit, calling it a "tremendous asset" in the 2005 annual report issued in February of this year. Late last summer, he made a strong statement about his intention to fix retail by hiring a high-powered new boss for the business: James Gorman, who made his name with the successful revamping of Merrill Lynch & Co.'s huge brokerage operation.

    The argument for owning a retail brokerage business at Morgan Stanley is the same now as it was in 1997, when the investment bank firm merged with Dean Witter to become a broad-based financial services company.

    Investment banks like to have ready-made channels to distribute shares of companies they take public, as well as a steady source of revenue from the individual investor market. "The key reason you want a retail sales force is that it's a good distribution channel for the sale of investment banking product," says Richard Bove, a securities analyst with Punk, Ziegel & Co. "You make more money selling your own product than you do in anything else but trading."

    But the marriage was troubled from the start, a clash of Wall Street and Main Street. Morgan Stanley has long been one of investment banking's elite firms, while Dean Witter was a mass-market stock brokerage; even its credit-card unit, Discover, had a down-market feel to it. Morgan Stanley executives spent a lot of time looking down their noses at their new colleagues. "They treated us like we were the Clampetts," one former Dean Witter executive told Fortune last year.

    Check out eWEEK.com's for the latest news, reviews and analysis on IT management from CIOInsight.com.

    Whatever political problems faced Purcell, a former McKinsey & Co. consultant, it was his own business decisions that ultimately led to his downfall.

    "If you think about the problem at Morgan Stanley that caused Phil Purcell to be dislodged, it was a belief that after the market crash in 2001 markets would not come back rapidly, so he changed the strategy from revenue generation to profit maximization," Bove says. "He started thinking of ways to cut costs, and reduced cash allocation to each division. He eliminated people. It's not surprising if he didn't reinvest in technology—he didn't reinvest in a bunch of areas in the firm. Since the core philosophy was wrong—the markets and the businesses did come back strongly—Morgan Stanley started to lag its peers. It all relates back to the core issue, the decision to hunker down and increase margins."

    This was especially true on the retail side. "They really haven't done a whole lot in retail in the last five years," says Jeffery Harte, an analyst in the Chicago office of Sandler O'Neill & Partners LP, referring to the business as a whole and not technology in particular. "Their retail brokerage was pretty good at selling mutual funds in the bubble years; once that changed they were slow to change in response."

    Like everything else, technology was being starved, too. While Merrill Lynch has spent $1 billion or more on its new broker systems, "Morgan Stanley kept the wagons circled, at least from a tech perspective," says Forrester's Doyle. "With all the turmoil inside, things froze, action froze."

    Mack has made fixing the brokerage's technology a public issue. "We will invest where we need to fix businesses, as in retail," he said at a conference in late 2005. "We have an investment to make in technology . ­. ­. that, for whatever reason, has not been made." Brokers, he said, "need technology," and he pledged to provide the "focus, investments and­ . ­. ­. leadership" to get the brokers what they need. Mack also spoke of the need for a "one-firm culture" and the imperative of rationalizing the company's "two technology platforms." Mack reiterated this position in the recently released 2005 annual report: "We are committed to addressing underinvestment" in retail, he said. The report went on to say, "We're going to upgrade our technology platforms and provide our financial advisors and investment representatives with a tool kit that is as competitive as that of our leading peers." A company spokesperson added: "Whether through technology investments in the branch system, or in new products or financial advisor tools, we are currently investing in technology that supports both our financial advisors and our clients."

    Story Guide:
    Morgan Stanley: Trading Sideways

  • The Road to Perdition
  • Systems Check
  • Follow the Money
  • Return on Noninvestment at Morgan Stanley

    See Also:
  • Austin Adams—JP Morgan Chase CIO and Prominent "Opponent" of Offshoring—Isn't
  • How to Make Mergers Work: Avnet Tries Buying Its Way to the Top
  • CIOInsight Customer Service Survey: Can You Profit as Customers Get Smarter?

    ZIFFPAGE TITLESystems Check


    Systems 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.

    Story Guide:
    Morgan Stanley: Trading Sideways

  • The Road to Perdition
  • Systems Check
  • Follow the Money
  • Return on Noninvestment at Morgan Stanley

    See Also:
  • Austin Adams—JP Morgan Chase CIO and Prominent "Opponent" of Offshoring—Isn't
  • How to Make Mergers Work: Avnet Tries Buying Its Way to the Top
  • CIOInsight Customer Service Survey: Can You Profit as Customers Get Smarter?