When James Gorman was tapped as Morgan Stanley's chief executive officer in 2009, the company, like many others at the time, was in a transformational period.
With the intention of blazing a new post-crisis trail for the company, Gorman - who had led the firm's wealth management business - soon signed onto a joint venture with Citigroup that would give the two firms shared access to Smith Barney's massive retail brokerage.
At the time, the deal marked a step toward balance — an effort to steer the company away from reliance on risk-based revenues. Four years later, with the acquisition of Citi's shares in the rear-view mirror, the strategic vision behind the paradigm shift is coming into sharper focus.
The full purchase of Citi's stake in the joint venture, completed in June 2013, presents an opportunity for Morgan Stanley's municipal underwriting team to leap ahead of its competitors. With access to more than 16,456 financial advisors, the firm now boasts the biggest exclusive brokerage in the country.
Pat Haskell, the head of Morgan's institutional muni business, declined to comment when asked if that sprawling network of retail investors is what Morgan Stanley needs to vault past its peers.
"It provides us the distribution capabilities equal to, if not better than, any of the top banks," he said.
But a look at the past decade's league tables tells a pretty clear story.
Year after year, Morgan Stanley has ranked around fourth among the top 10 municipal underwriters, as Bank of America, propelled by retail business after the purchase of Merrill Lynch, wedged a gap between itself and the trailing top five underwriters.
BofA led $45 billion of deals in 2013, followed by JP Morgan and Citi, who expanded their shares to $38.5 billion and $36.8 billion, respectively. Morgan Stanley brought in $20.6 billion.
Now with a brokerage arm that's bigger than league leader BofA Merrill Lynch's 15,316 advisors, it's clear that Morgan Stanley's eyes are on the prize.
"We're going to try and be better at munis in 2014," Haskell said in an interview at the firm's headquarters in midtown Manhattan. "We're going to add risk, we're going to add balance sheet, and we're going to add people."
Nearly 65% of municipal bonds go into retail hands, and for a full-service institution that both writes the bonds and sells them, having access to such a wide array of investors is an invaluable asset, according to Tom Dalpiaz of Granite Springs Management.
"It makes sense for an entity that has a large retail presence to have a very robust underwriting effort in municipal bonds," Dalpiaz, a managing director, said in an interview. "In the municipal business there is still a very large part of the market that is dominated by the retail investor."
Haskell was running the North America rates business for Morgan Stanley when he was asked by Michael Heaney, global co-head of fixed income, to lead the company's municipal effort after the purchase was complete.
It was understood from the onset that the interplay of municipals between the institutional securities business and wealth management would be a core part to the firm's post-financial crisis strategy.
"We plan on growing the municipal business aggressively," Haskell said. "I think it's going to be a time when firms are doing a lot of retrenching, both from a personnel and capital perspective. Alternatively, we are focused on growing our footprint in this business."
Haskell and Charlie Visconsi, co-head of public finance, plan to build the business by taking larger chunks of deals to retail, and offering a diversity of products to issuing clients, including providing direct lending when appropriate, and adding feet on the ground in high-profile municipal regions around the country.
"Morgan Stanley Bank now has deposits exceeding $100 billion," Visconsi said. "The bank needs to put that money to work. This provides an opportunity to offer commercial bank products to our issuer clients."
Putting that money to work through such a Goliath retail network could be an onerous task at the onset, said Tim McGregor, head of municipals at Northern Trust.
"They've been outstanding on the institutional side, and now they have the chance to parlay that on the retail side," McGregor said in an interview. "There's a bit of a learning curve to get retail traders on the same page as institutional traders."
Dealing with retail clients will mean a constant stream of inquiries that will need to be handled systematically, Dalpiaz said. Communication between research teams, bankers and advisors will be pivotal to a smooth operation.
"Focusing on operational issues will be key to success," Haskell said. "We have to integrate the strengths of the platform in order to make all our clients happy with access to our resources."
Morgan Stanley won't be the only firm with impressive retail roots. In December, Citi rebuilt its network through a deal with UBS Financial Services that provides access to 17,000 shared brokers. Wells Fargo has 15,280 advisors at its disposal.
The broadened retail base puts Morgan Stanley in a position to provide new services to each of its clients, Haskell and Visconsi said. For financial advisors, it means a selection of bonds from an array of issuers. For the issuers, it means providing access to capital regardless of market conditions.
"One of the ways to do that is to get bonds into retail hands and the other way is to expand the investor universe," Haskell said. "We think we're much better prepared than we were in the past to offer a variety of products to our issuing clients that we did not have available to us before."
Large mutual fund and hedge fund clients, whose massive string of outflows only recently slowed, may be less of a focus in the future for dealers like Morgan Stanley, according to Mike Pietronico, CEO of Miller Tabak Asset Management.
"We suspect the future of business is going to be more separately managed and individual accounts, versus mutual funds," Pietronico said in an interview. "With that in mind, having access to advisors managing individual accounts can only assist a broker-dealer."
Those SMAs have shown strong demand for bonds maturing in 5 to 10 years, in the intermediate part of the curve, as "ladder-based" investing strategies take hold in a bear market, Haskell said.
Building out the business will mean a wave of new region- and sector-based personnel additions as the firm looks to provide paper from major issuers like the state of California.
"The best real time metric to see how we're advancing our footprint is with volume, and in the last few months we continue to see stronger than average volume," Haskell said. "We expect it to continue to be much better as we add resources."
The firm brought on David Hammer, formerly of PIMCO, as head of secondary trading. Bankers have also recently been added in health care, student loan and higher education sectors, Haskell said.
By reaching into more of the market, Morgan Stanley's approach to retail has bolstered the company's earnings. Net revenue rose 9% to $14.5 billion in 2013, driven by gains in the wealth management sector.
With each deal like November's New Jersey Building Authority bonds, in which Morgan Stanley retailed $215 million of a $327.8 million deal, issuers such as the state's assistant treasurer Steven Petrecca are likely to come back for more.
"It's about tapping all or as many market segments as possible for a better price on the issue," Petrecca said. "They showed they were able to do a complex transaction from beginning to end, pared costs, and the state is very happy."
