No contest: Merrill stomping MSSB in wirehouse wars

In the clash of the two largest U.S. brokerages, Bank of America Merrill Lynch is generating more profit with fewer people than Morgan Stanley Smith Barney LLC.

Merrill Lynch, acquired by BofA last year, produced $315 million more profit from its brokerage in the first half than MSSB with 2,900 fewer financial advisers, according to company filings. Its pretax profit margin, 16.7% for the same period, is more than double MSSB’s 7.8%.

The profit figures are unsettling for MSSB, which was formed when Morgan bought a controlling stake in a joint venture with Citigroup Inc.’s Smith Barney. The combined operations catapulted Morgan from fifth-largest to first, by client assets.

GORMAN, KRAWCHECK

The job of catching up falls to Morgan Stanley chief executive James P. Gorman, 52, who ran Merrill Lynch’s private-client group from 2001 to 2005 and spearheaded a shift to higher-wealth customers. He must now compete with a company still benefiting from that strategy.

To help him, Mr. Gorman has three Merrill veterans. MSSB president Charles D. Johnston began his career as a financial adviser at Merrill Lynch, and Andy Saperstein, who runs the brokerage’s U.S. operations, was recruited from Merrill by Gorman in 2006. Mr. Gorman, who became chief executive in January, also hired former Merrill Lynch investment bank head Greg Fleming to lead asset management.

Their chief rival is Sallie Krawcheck, 45, who oversees Merrill Lynch as president of BofA’s wealth unit. She is now going head to head with Smith Barney, which she led from 2002 to 2004, and again in 2008 when she worked for Citigroup.

“We’ve got the leadership position, but we can’t rest,” Ms. Krawcheck wrote in an e-mail. “Staying focused on the clients, meeting the needs and demands that have come out of the downturn and leveraging the competitive advantages of Bank of America will keep us ahead.”

Mr. Gorman declined to comment. A spokesman for Morgan Stanley, Jim Wiggins, said that the firm likes its position.

“LEADING POSITION’

“The Smith Barney deal enabled Morgan Stanley to go from subscale to a leading position in wealth management overnight,” he said. “There are great synergies with our institutional businesses, and we have a clear, multiyear plan to grow the profit margin as we integrate two large franchises.”

There is more at stake for MSSB, which got 36% of first-half net revenue from wealth management, than for BofA, which relied on the Merrill Lynch brokerage for 10% of net revenue.

The firms manage about the same amount of client assets — $1.4 trillion at Merrill Lynch compared with $1.5 trillion at Morgan Stanley — and have comparable revenue: $6.4 billion in the first half at Merrill and $6.2 billion at its competitor.

BROKER REVENUE

They part ways on profit and revenue per broker.

Merrill Lynch earned $675 million from its brokerage business in the first half, while MSSB reported profit of $360 million. Merrill Lynch’s 15,142 brokers brought in an average of $836,000 on an annualized basis, compared with $682,000 for MSSB’s 18,087.

The pretax margin at Morgan Stanley’s wealth management unit slumped to less than 10% this year from 17% in 2007, in part because the firm spent more to recruit brokers to replace those who left because of concerns about the company’s future, said Daniel Arbeeny, managing principal at CMF Partners LLC, a corporate search firm.

“Morgan Stanley came really close to being pounced on, so a lot of people fled for safety,” Mr. Arbeeny said, referring to the period after the collapse of Lehman Brothers Holdings Inc. in September 2008, when Morgan Stanley’s stock dropped 78% before the firm received investments from Mitsubishi UFJ Financial Group Inc. and the U.S. government.

Morgan Stanley had 11% fewer brokers as of June 30 than when the Smith Barney merger was an-nounced in January 2009. Revenue per adviser remains a third higher than before Mr. Gorman arrived in 2005, though down from a peak of $811,000 in 2007.

Morgan Stanley, the nation’s sixth-largest bank by assets, is pushing back its target to achieve a 15% profit margin, chief financial officer Ruth Porat said on a July 21 conference call with investors. She blamed the delay on weak market conditions, including the May 6 flash crash that unnerved many investors. The brokerage’s profit margin fell in the second quarter, when it had a $5.5 billion outflow of assets.

The merger with Smith Barney “is probably not going as well as they originally thought,” said Douglas Sipkin, an analyst at Ticonderoga Securities LLC who has a “neutral” rating on Morgan Stanley. “They have pushed out their margin targets, which they blame on the markets. But I’m skeptical of that excuse because stock prices are still a lot higher than last year.”

Merrill Lynch has also shed brokers. It had 16,000 in September 2008 when the deal with Bank of America was announced. BofA already had about 2,000. Ms. Krawcheck, recruited by former BofA CEO Kenneth D. Lewis in August 2009, has stanched fears of a continuing exodus by adding about 150 brokers in the past year.

SIMPLER INTEGRATION

The large size of Merrill Lynch, compared with Bank of America’s brokerage unit, made the integration simpler than Morgan Stanley’s, which was a combination of two similarly sized operations, said Guy Manuel, founding partner of the consulting firm CBM Group Inc.

Morgan Stanley reported about $200 million in one-time integration costs in the first half. Mr. Gorman said in February that the brokerage would have $450 million in integration costs this year, after $280 million in 2009. He said he expects a minimum of $1.1 billion in cost savings at the unit by 2011.