It turns out no one is safe from cross-selling, not even the financial advisors at Morgan Stanley.
Cross-selling, the strategy of selling multiple financial products to existing customers, has become increasingly popular in the aftermath of the financial crisis. The mergers that occurred during the crisis brought together retail banks, investment banks and brokerages (Bank of America/Merrill Lynch, Morgan Stanley/Smith Barney, Wells Fargo/Wachovia) to help fuel the cross-selling race.
It's a strategy that Sanford C. Bernstein Research analyst Brad Hintz describes as throwing multiple ropes on a client via financial products so that it becomes more difficult for them to leave the firm. The idea is to make more money off of existing clients by offering them the breadth and depth of the firm's offerings.
It's typical at firms like BofA/Merrill where the bank likes to see its mortgages, loans, credit cards and so forth in the portfolios of the Merrill Lynch wealth management clients who work with financial advisors for investment advice. Cross-selling has been a specialty of Wells Fargo's, averaging a best in class 5.9 products per customer in its retail banking business.
At Morgan Stanley CEO James Gorman appears to be banking on the strategy as well hoping that his "sales and trading unit will work more closely with wealth management to increase lending, better tailor structured products for retail clients and improve collaboration on events like public offerings," according to Dealbook. Morgan Stanley employs some 17,000 financial advisors in its wealth management unit which accounts for more than half of the company's earnings. The remaining comes from its institutional businesses like its investment banking business.
Gorman is under pressure to get the firm back in shape following several disappointing quarters. He's been busy trying to downsize some of the investment banking business including the fixed income trading business while making wealth management the firm's main business line.
It's been a tough road though. Morgan Stanley entered a joint venture agreement with Citi to acquire the Smith Barney unit and the merger has had plenty of bumps including longer than expected technology integration. Back in 2010, Gorman told investors the pretax profit margin would reach 20% by mid 2013. In 2011, the firm lowered the goal to 15%. The unit finally hit 17% in the fourth quarter of 2012 but it took longer than most had hoped for. Last summer bank analyst Mike Mayo said the firm would be worth more to investors if it was broken up.
Now it seems Morgan Stanley is finding its footing. Shares are up 27% this year compared to 5% at BofA and UBS. Wells is up just 3% this year while Goldman Sachs is up 24%. Gorman has laid out his plan to get wealth management and sales and trading to work together. A task that's not been easy in the past as both sides are fiercely competitive and would rather not share their spoils.
"The message he's sending to the investment bankers is 'Don't ignore your wealth management clients because they're a very important part of the firm.' The lecture to the whole firm is that 'We all wear Morgan Stanley blue here so let's play nice,'" says Hintz.
He adds, "This is a very difficult challenge, changing a corporate culture since it was lost under [Phil] Purcell." (Purcell ran Morgan until 2005 and was the architect behind the Morgan Stanley Dean Witter deal.)
Gorman's cross selling strategy will be interesting to watch since unlike BofA or Wells he doesn't run a retail bank; meaning his wealth management unit won't be focusing on credit cards or mortgages. Instead, there will be more opportunity for its retail clients to get in on public offerings, private equity funds or a special commodities fund, and lending, explains Hintz. Areas that are much more profitable than banking, he says.
The challenge will be getting the two sides, wealth management and sales and trading, to cooperate.
Then again no one said cross-selling is easy.
