More pink slips at MSSB? Firm aims to pare costs with adviser cull, tech integration

Bank may cut headcount at its brokerage beyond previously announced targets; underwhelming first quarter

With Wall Street analysts ratcheting down their earnings estimates for Morgan Stanley, it’s no surprise that the firm’s chief financial officer, Ruth Porat, was emphasizing cost cutting — including possible job cuts — and increased productivity at a Deutsche Bank AG conference in New York yesterday.
The firm’s wealth management joint venture with Citigroup Inc. — Morgan Stanley Smith Barney LLC, is a key focus for the firm. It is currently nowhere near the 20% pretax operating margin that chief executive James Gorman set as a target for the unit post-integration.
“We’re pleased with our progress, and the MSSB integration remains on track,” Ms. Porat said at the conference. “The margin is not where we’d like it, but we’re approaching an important milestone.” That milestone is the migration of the first of MSSB’s 17,800 advisers to a new technology platform. The firm is replacing three legacy platforms for its financial advisers with one, and Morgan Stanley advisers will be the first to move in the third quarter. Legacy Smith Barney advisers will join them by the middle of next year, Ms. Porat said.
That technology integration in the brokerage represents a big part of the annual $1 billion in cost savings the firm hopes to achieve by 2014. Ms. Porat also gave notice that the firm may look to reduce further the number of advisers at the firm. “We may reduce our broker head count below previously announced targets,” she said, referring to the original goal of approximately 17,500.
“This has been an issue for Morgan Stanley from before the joint venture,” said Jeff Harte, a principal and analyst with Sandler O’Neill + Partners LP. “They’ve been culling their bottom producers and they’ll further reduce the adviser count from both sides of the venture.”
Mr. Harte, who has reduced his 2011 earnings estimate to $0.97 per share, from $1.15, has been disappointed with the progress of the integration so far. “I would have thought they’d have the system convergence done by now,” he said. Nevertheless, he believes that the wealth management unit eventually will reach the 20% target margin with some help from the market.
“It’s going to take some revenue tail wind, but I think they’ll get there,” said Mr. Harte, who has a “buy” rating on the stock and a target price of $31. The stock is currently trading at $22.