In the clash of the two largest U.S. brokerages, Bank of America Corp.'s Merrill Lynch is generating more profit with fewer people than the business Morgan Stanley formed by buying a controlling stake in a venture with Citigroup Inc.'s Smith Barney.
Merrill Lynch, acquired by B of A in 2009, produced $315 million more profit from its brokerage in the first half than Morgan Stanley with 2,900 fewer financial advisers, according to company filings. Its pretax profit margin, 16.7% for the same period, is more than double Morgan Stanley Smith Barney's 7.8%.
The worst financial crisis in 70 years shook the brokerage landscape, catapulting Morgan Stanley from fifth largest to first by client assets and enabling B of A to acquire industry leader Merrill Lynch. The advantage wielded by Merrill stems from a simpler integration and from pushing clients into deposits and other products as individual investors fled stock markets, analysts said.
"Merrill Lynch long ago led in banking, financial planning, insurance, and they are the more diversified firm," said Charles Roame, managing principal of Tiburon Strategic Advisors, an industry consulting firm in Tiburon, Calif. "It will win the banking-integration bet. Morgan Stanley will not catch them."
The job of catching up falls to Morgan Stanley's chief executive, James P. Gorman, 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, he has three Merrill veterans.
Morgan Stanley Smith Barney's 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. Gorman, who became the CEO in January, also hired former Merrill Lynch investment bank head Greg Fleming to lead asset management.
Their chief rival is Sallie Krawcheck, who oversees Merrill Lynch as the president of Bank of America's wealth unit. She's now going head to head with Smith Barney, which she led from 2002 to 2004 and in 2008 when she worked for Citigroup.
"We've got the leadership position, but we can't rest," Krawcheck said in an e-mail.
Gorman declined to comment. A spokesman for Morgan Stanley, Jim Wiggins, said the firm likes its position.
"The Smith Barney deal enabled Morgan Stanley to go from subscale to a leading position in wealth management overnight," Wiggins 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 may be more at stake for Morgan Stanley, which got 36% of first-half net revenue from wealth management, than for B of A, 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 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.
They part ways on profit and revenue per broker. Merrill earned $675 million from its brokerage business in the first half, while Morgan Stanley Smith Barney reported profit of $360 million. Each of Merrill's 15,142 brokers brought in $836,000 on average on an annualized basis compared with $682,000 for Morgan Stanley's 18,087.
