Sarch: Behind the defection infection at MSSB

In the near future, the Smith Barney name will disappear below the horizon, following its culture which has…

In the near future, the Smith Barney name will disappear below the horizon, following its culture which has long been swallowed up within Morgan Stanley. The final Smith Barney offices converted to the new “3D” technology over the weekend of July 7-8, while senior management is apparently planning another round of layoffs and office complex consolidation, mysteriously named “Project August.”

The trade press continues to report on large defections from MSSB around the country. This diaspora may be a result of the culture change, or possibly a decrease in service levels to the adviser. Or maybe, senior management has failed to show an understanding of what their own advisers do every day.

For example, built within the 3D system is a sophisticated price metrics system. It analyzes typical fees and commissions charged to clients all over the country. By all accounts, it is a useful tool. But picture this scenario: Joe Adviser gets a referral from his old college friend, Mary, an estate attorney. Mary is one of Joe’s main centers of influence and has referred dozens of significant relationships to Joe over the last ten years. She calls Joe and tells of an estate liquidation of $10 million. Mary and Joe feel, based on the relationship with the family and Joe’s track record, that there is a 75% chance that the family will establish a long term relationship with Joe. At a fee of 1.25%, MSSB and Joe are looking at an evergreen $125,000 per year relationship that will grow over time. Mary tells Joe, however, that he needs to severely discount the initial trades in order to win the business. That level of discount gets rejected by the price metrics analytics. Attempts to override the system with human beings who presumably are capable of understanding the business opportunity also fail, because no manager up the chain of command wants to say: “Yes, do that trade. It makes sense in order to win that business.” In a culture where if you have watched colleague after colleague disappear, saying no is easier than saying yes.

But MSSB spokesmen, in article after article, all say that MSSB has a robust recruiting pipeline and that they are bringing in more production than they are losing. Publicly, they tell everyone to stay calm, that all is well with the conversions, with the new systems, with the culture. Picture Kevin Bacon at the end of Animal House. If you don’t recall the scene, watch it below.

The astounding irony here is that while MSSB tells the public, the industry, and the trade press that the franchise is doing great, they must be telling Citi quite the opposite. Morgan Stanley is in negotiations to buy a bigger slice of the MSSB joint venture from junior partner, Citibank. The house is for sale: Citi wants as much as they can for it and MS wants to buy it as cheaply as possible. It’s been reported that they so far have been unable to agree on what MSSB is worth, with (surprise!) Citi having a higher valuation for the franchise than MS. Extraordinary circumstances are making MS sell AGAINST their own franchise!

Senior leadership at MS: I’m available to consult as an expert witness in your negotiation with Citi so that Citi understands how the MSSB franchise is under siege and bleeding assets.