Morgan Stanley: Trading Sideways

Edward Cone Avatar

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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.

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Morgan Stanley: Trading Sideways