Morgan Stanley looks to make market moves

With $1,300bn (E930bn) in assets under management following the addition of $800bn in private client funds from Smith Barney in the US after a joint venture with Citigroup, Morgan Stanley has become the powerhouse to watch in wealth management. Yet the greatest growth, for this North American oriented business, is expected to come from Europe, under the stewardship of Emea sales boss Ausaf Abbas, ex head of private banking at Merrill Lynch and a legendary figure in the wealth management world. “The vast majority of assets and revenue are currently US related,” says Mr Abbas, whose division in London is believed to have booked around £12bn (E14.2bn) of the global total. “That’s why we are optimistic on the international side. The business is geographically biased to the US and that is something senior management is keen to change by growing the business elsewhere.” This is a reference to James Gorman, co-president of Morgan Stanley and chairman of the wealth management joint venture, who has previously stated his desire to grow through acquisitions and expand internationally. The two are regularly reviewing opportunities to buy up private banking assets from rival operators in Europe, pointing to the “distressed nature of some of our competitors.” Businesses the industry believed were not for sale at any price last year, now appear to be on the block. The Smith Barney situation is a good example of how circumstances can change quickly and cash-draining problems in investment banking can lead executives to realise value from their private banking business. Now that valuations are starting to come down, Morgan Stanley expects to go into the market once more, particularly in its lucrative UK-centred stomping ground. “This is probably the fourth largest pool of wealth in the world,” says Mr Abbas in his office overlooking the financial district of London’s Canary Wharf. “There is plenty of business here, so we are not concerned by other players with fiercely ambitious plans to dominate the UK market,” he smiles, with a swipe at the likes of Credit Suisse, UBS and Deutsche Bank, which have all made success in the UK wealth market a huge priority. The reason Mr Abbas can afford to be smug is his business model, which differs significantly to mainstream wealth management operations offered by Swiss, German and some US banks. Morgan Stanley typically turns away clients with less than $10m in investible assets, meaning its key competitors in the battle for ultra high net worth clients are the likes of JPMorgan and the more secretive wealth division of Goldman Sachs. “Our focus is on the more rarefied customer base,” says Mr Abbas. “We don’t aspire to have thousands of clients in the UK, only several hundred.” He contrasts Morgan Stanley’s mode of operation to the likes of big brand mass market operators such as Barclays Wealth, who can sell products and services through extensive branch networks to predominantly domestic customers. “We do something different. We are trying to provide wealth solutions to internationally mobile clients, where we can focus on both their global and domestic requirements.” Morgan Stanley has 100 client advisers in the Emea region, reporting to Mr Abbas, compared to the 400 he had in his previous role at Merrill Lynch. He achieved some notoriety there during a high profile employment tribunal case when a senior female banker who reported to him claimed unfair dismissal, sex discrimination, victimisation and unequal pay. Despite some colourful allegations which hit the headlines, the case was dismissed. Yet outside this high drama, there were more interesting revelations about Merrill’s business model which came out in the case, with doubts about the experience of some staff supervising large numbers of bankers in regional offices. Centralised operation Mr Abbas notes that Morgan Stanley’s operation in Emea is much more centralised, with just three hubs in London, Zurich/Geneva and Dubai, and smaller offices in Milan, Munich and Riyadh. “We will not see expansion of that footprint in the next couple of years, unless it is through acquisition,” he says. He declines to give exact figures, but says the revenues gathered by his staff are “several multiples” of the $630,000 per adviser brought in by the army of 8,100 financial advisers in the US operation which Morgan Stanley reported for the first quarter of 2009. While clients are given the choice of using the group’s Swiss bank or UK entity, he says Morgan Stanley operates a predominantly offshore model in wealth management. “We are talking about people living in France or Germany, for example, opening accounts in the UK,” he says. “Offshore does not mean undeclared money, but money legitimately kept outside its home jurisdiction, in London or Switzerland, for example. Given the nature of our clients, having a branch network does not make sense for us.” Mr Abbas draws a line between the global Morgan Stanley PWM business and that of local subsidiary Quilter. This UK wealth manager had originally been offloaded by Morgan Stanley to Citigroup, but is embarrassingly back under Morgan oversight once more as part of the Smith Barney deal. The targets of Quilter’s operations are lower down the wealth scale, with clients serviced by local offices, including a presence in Jersey, Guernsey, Dublin and Northern Ireland. “The client segment is different to that of Morgan Stanley PWM. They work closely with IFAs and they need to be closer to local lawyers and accountants so they need branches around the country,” says Mr Abbas. Something about his body language says he is not altogether impressed with this second string to his bow, servicing clients with assets worth at least £500,000. His key constituency of ultra high net worth clients are offered seven portfolio options, starting with 90 per cent fixed income right up to “the other extreme”, although he insists the bank exercises a lot of control over discretionary portfolios. Clients have suffered Despite this choice of investment profiles, customers could not avoid being severely affected by the financial crisis, he believes. “It doesn’t matter what asset allocation you had last year,” says Mr Abbas. “Investors were all significantly damaged. Even if you were diversified in 2009, you probably still lost a lot of money; the usual idea of investing in uncorrelated asset classes, which are meant to offset each other, simply did not work.” The currently fashionable core-satellite approach being promoted by UBS, with huge allocations to exchange traded funds (ETFs) in the core is not one which finds favour. “The new approach to wealth management does not wash,” he says. “We do use ETFs, but not excessively at the core of our portfolios.” Instead, the 40-strong London-based investment group of dedicated professionals is tasked with creating bespoke portfolios for clients on an open architecture basis. “Morgan Stanley has some great products, but we don’t have a monopoly on them. We run a multi-manager platform to offer the best products to clients. Our asset management division has to compete like other managers to get onto that platform,” claims Mr Abbas. In his role at Merrill, selling structured products to private clients was often the key part of the operation when it came to driving profitability. The story is different at Morgan Stanley, he says. “We sell structured products, but they are not at the core of our approach.” Clients are specifically asked whether they want hedge funds and other alternatives such as real estate in their portfolio. “Our client base is more reluctant to invest in hedge funds right now as there was a significant level of disappointment with performance in 2008 alongside issues surrounding gating restrictions and liquidity. But the vast majority still want alternatives,” insists Mr Abbas. The industry has scored a number of own goals, he believes, but sophisticated clients have a good understanding of the problems surrounding the hedge funds sector and have already started to focus on new opportunities in distressed debt, event driven funds, convertibles and emerging markets. Morgan Stanley’s specialist manager Graystone in the US is used to construct and run hedge fund portfolios for private clients. “Clients need advice now more than at any other time. Just going to managed account platforms and ticking boxes is not what they want.”