James Gorman: Making Morgan Stanley Merrill-like

James Gorman’s deft balancing act of the retail and institutional sides of Morgan Stanley could pay off handsomely in 2011.

Since becoming president and chief executive of the firm on Jan. 1, the cool and seemingly always collected Mr. Gorman has tidied up the institutional side of the house, closing some proprietary trading desks and spinning off others. The firm also has closed or spun off hedge fund operations.

Of course, Mr. Gorman’s first year on the job has not been without its bumps. In the third quarter, the firm saw profits of $313 million from continuing operations, compared with almost $1 billion in the year-earlier period.

“We should not be a firm that is betting our shareholders’ capital for our own benefit; we should be working with our shareholders’ capital for our clients’ benefit,” Mr. Gorman, 51, said in measured tones at the November annual meeting of the Securities Industry and Financial Markets Association, Wall Street’s leading trade group. “Leverage is a killer.”

Meanwhile, at the same meeting, he quickly moved to curtail market speculation that Morgan Stanley will delay its purchase of the rest of Smith Barney from Citigroup Inc. Morgan Stanley owns 51% of Smith Barney and has options to acquire the remaining 49% in three bites, the first in 2012. He called the acquisition “an extraordinary opportunity” and said Morgan Stanley intends to move forward at the first trigger date.

“A CLEAR VISION”

Mr. Gorman “does have a clear vision,” says longtime industry analyst Richard Bové, now with Rochdale Securities LLC. From his first day on the job, Mr. Gorman understood that the firm had to shift to a system that delivered products, from one that relied on proprietary trading, real estate and private equity, Mr. Bove said.

And Mr. Gorman’s past experience as head of retail brokers at Merrill Lynch & Co. Inc. will have an effect on Morgan Stanley, according to Mr. Bové and others. “That’s where he comes from,” Mr. Bové said. “That’s where Morgan Stanley is going.”

While the Street still likes to compare Morgan Stanley to The Goldman Sachs Group Inc., its longtime rival, some think that that comparison is a bit tired. Goldman Sachs has shunned retail brokerage.

Now with 18,000 registered reps, Mr. Gorman’s Morgan Stanley Smith Barney LLC could be a firm more akin to the former Merrill Lynch, which had the industry’s leading sales forces of wealth management and retail-oriented brokers before it was forced into merging with Bank of America Corp. during the financial crisis. Mr. Gorman had left Merrill Lynch in 2006 to join Morgan Stanley.

A former partner at McKinsey & Co., he joined Merrill Lynch in 2001 and led the private-client group. “He reinvigorated the brokers at Merrill and learned the business,” said Rick Peterson, an industry recruiter who works with Morgan Stanley and several other securities firms. Mr. Gorman “is an exceptionally bright guy poised to take Morgan Stanley back to the heights of [where it was] before the crash,” he said.

— Bruce Kelly