RPT-UPDATE 1-Challenges for Morgan Stanley's Smith Barney

By Joseph A. Giannone and Steve Eder

NEW YORK, March 16 (Reuters) - Morgan Stanley Smith Barney is already fighting a talent war while integrating two arch-rival brokerages. Now an even tougher test lies ahead -- putting more than 18,000 advisers on the same computer system.

Driven to the brink during the 2008 financial crisis, Morgan Stanley last January moved to acquire control of Citigroup Inc's Smith Barney to create the largest U.S. brokerage. Since then more than 2,000 brokers have jumped ship -- and drained $17 billion of assets -- during a brutal recruiting war among Wall Street firms.

Yet Morgan Stanley Smith Barney President Charlie Johnston says attrition has slowed to historic lows and management integration has been completed. For the rest of this year, assets and revenues should recover, he told Reuters.

'I don't know if the recruiting wars are over, but certainly the movement among the full-service firms has gone down dramatically,' Johnston said in an interview. 'We're not going back to the frenzy you had a year or two ago.'

MSSB ended last year with 18,135 advisers and $1.56 trillion in assets, below the combined 20,000 brokers and $1.7 trillion on hand when the merger was announced January 2009.

The bulk of the defections involved Smith Barney advisers, said Johnston, who previously ran Smith Barney. He contends that movement was driven more by Citi's plunging stock and financial struggles than any merger concerns.



A NEW PLATFORM

Putting two brokerages together took more than eight months and came with more than a little heartache.

'When you announce the deal, everyone is excited about it,' Johnston said. 'But the next day, everyone is looking over their shoulder because they realize they have a job at one firm and somebody else has that same job over there.'

A senior management team was in place two months before the deal was completed in June 2009, and the new firm began aligning its ranks up and down the ladder. That process was concluded just last month.

Now an even bigger task will be to put Morgan Stanley and Smith Barney financial advisers on the same technology platform.

The firm is tackling the project cautiously, and it is not expected to be completed until September 2011. Johnston said management spent six months studying its options before choosing a Morgan Stanley platform augmented with Smith Barney capabilities.

Morgan Stanley brokers are expected to be on the platform by the summer of 2011, with Smith Barney brokers joining later.

'In the meantime, we are running two completely separate programs,' Johnston said. 'That's the way mergers work.'

It does extend, though, the period of stress and distraction.



HIRING

Johnston noted that the Morgan Stanley Smith Barney deal was driven by a desire to create scale, which spreads overhead costs across more brokers. Yet scale also generates its own challenges.

'A merger is enormously distracting,' Johnston said, estimating managers were spending 80 percent of their day on integration as opposed to business development.

'Now that we have a little blue sky, before we get to the technology integration, I think that will have a positive impact on net flows as well,' he said.

Next year, the firm expects to add $50 billion in net new assets. That is a big number but still only an increase of 3 percent from current total assets.

'We have to walk before we can run and we're just getting ready to run,' he said.

Johnston said he expects MSSB's brokerage force to ebb and flow between 17,500 and 18,500 advisers. He does not intend to expand dramatically over that level, preferring to generate more revenue with the army he has.

Noting it is a good year when a firm needs to replace only 10 percent of its brokers, Johnston said, 'We're always in the hiring business.' MSSB needs to recruit and train at least 1,800 people each year just to stay still.

Recruiting became extremely expensive last year, as firms offered fat pay packages to lure brokers from rivals and hefty retention plans to keep their advisers in place.

'We're at a point in time where the economics in recruiting have been off the charts. So you'll see us weighted more toward new associates and fewer recruits,' he said.

Johnston also observed that brokers as a group are graying, with a 'significant' percentage of advisers reaching an age where they intend to retire or at least soon slow down.

Morgan Stanley Smith Barney is now expanding a program of hiring students who have just gotten out of school and may be interested in Wall Street careers without the challenge of building brokerage practices from scratch.

Instead, the firm is expanding an 'adviser associate' program that connects graduates with veteran brokerage teams.

'Wouldn't I love to hook up with a senior successful producer and work my way into their team, with a chance to have a growing percentage of the team over time?'

(Reporting by Joseph A. Giannone and Steve Eder; Editing by Gary Hill)

(([e-mail]; [phone]; Reuters Messaging: [e-mail] )) MSSB'S JOHNSTON SAYS RECRUITING WARS ARE OVER, SEES MORE TRAINEES

The bulk of the defections involved Smith Barney advisers, said Johnston, who previously ran Smith Barney. He contends that movement was driven more by Citi's plunging stock and financial struggles than any merger concerns.



A NEW PLATFORM

Putting two brokerages together took more than eight months and came with more than a little heartache.

'When you announce the deal, everyone is excited about it,' Johnston said. 'But the next day, everyone is looking over their shoulder because they realize they have a job at one firm and somebody else has that same job over there.'

A senior management team was in place two months before the deal was completed in June 2009, and the new firm began aligning its ranks up and down the ladder. That process was concluded just last month.

Now an even bigger task will be to put Morgan Stanley and Smith Barney financial advisers on the same technology platform.

The firm is tackling the project cautiously, and it is not expected to be completed until September 2011. Johnston said management spent six months studying its options before choosing a Morgan Stanley platform augmented with Smith Barney capabilities.

Morgan Stanley brokers are expected to be on the platform by the summer of 2011, with Smith Barney brokers joining later.

'In the meantime, we are running two completely separate programs,' Johnston said. 'That's the way mergers work.'

It does extend, though, the period of stress and distraction.



HIRING

Johnston noted that the Morgan Stanley Smith Barney deal was driven by a desire to create scale, which spreads overhead costs across more brokers. Yet scale also generates its own challenges.

'A merger is enormously distracting,' Johnston said, estimating managers were spending 80 percent of their day on integration as opposed to business development.

'Now that we have a little blue sky, before we get to the technology integration, I think that will have a positive impact on net flows as well,' he said.

Next year, the firm expects to add $50 billion in net new assets. That is a big number but still only an increase of 3 percent from current total assets.

'We have to walk before we can run and we're just getting ready to run,' he said.

Johnston said he expects MSSB's brokerage force to ebb and flow between 17,500 and 18,500 advisers. He does not intend to expand dramatically over that level, preferring to generate more revenue with the army he has.

Noting it is a good year when a firm needs to replace only 10 percent of its brokers, Johnston said, 'We're always in the hiring business.' MSSB needs to recruit and train at least 1,800 people each year just to stay still.

Recruiting became extremely expensive last year, as firms offered fat pay packages to lure brokers from rivals and hefty retention plans to keep their advisers in place.

'We're at a point in time where the economics in recruiting have been off the charts. So you'll see us weighted more toward new associates and fewer recruits,' he said.

Johnston also observed that brokers as a group are graying, with a 'significant' percentage of advisers reaching an age where they intend to retire or at least soon slow down.

Morgan Stanley Smith Barney is now expanding a program of hiring students who have just gotten out of school and may be interested in Wall Street careers without the challenge of building brokerage practices from scratch.

Instead, the firm is expanding an 'adviser associate' program that connects graduates with veteran brokerage teams.

'Wouldn't I love to hook up with a senior successful producer and work my way into their team, with a chance to have a growing percentage of the team over time?'

(Reporting by Joseph A. Giannone and Steve Eder; Editing by Gary Hill) Keywords: MORGANSTANLEY/ ([e-mail]; [phone]; Reuters Messaging: [e-mail] ) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.