Jan. 12 (Bloomberg) -- Morgan Stanley’s James Gorman may become the likely successor to Chief Executive Officer John Mack by taking charge of the firm’s brokerage joint venture with Citigroup Inc.

Mack, 64, has a five-year contract that’s up for renewal next year. Gorman, a 50-year-old Australian, may oversee the venture, tentatively named Morgan Stanley Smith Barney, a person with knowledge of the matter said. Gorman has been one of two co-presidents at the New York-based firm for more than a year.

“James Gorman would emerge as the key executive at the company and, presumably, be in lead position to be the next CEO in 2010,” Richard Bove, an analyst at Ladenburg Thalmann & Co. in Lutz, Florida, wrote in a note to investors on Jan. 10. “This acquisition would increase meaningfully the importance of retail finance and perhaps banking at Morgan.”

Morgan Stanley is leaning more on individual investors for fee income and banking deposits as its traditional business of advising corporations slows. The firm has booked more than $21 billion in trading losses and writedowns on loans and bonds and was forced to convert to a bank in September after investors lost faith in brokerages that relied on debt markets.

Spokespeople at Morgan Stanley didn’t return calls and e- mails seeking comment.

The firm said in October that it planned to use its 8,500 financial advisers in 500 branches to help attract bank deposits from wealthy individuals. A tie-up with Smith Barney, which may be announced early this week, would provide the company with 13,500 additional advisers in about 600 U.S. offices, creating the world’s largest provider of financial advice to individuals.

Institutional Securities

Morgan Stanley may pay between $2 billion and $3 billion to win 51 percent of the joint venture, giving the firm control over about 22,000 advisers, according to a person familiar with the matter. The combined company would have more than $14 billion in annual revenue, putting it on a par with Morgan Stanley’s institutional securities division, which generated $16.6 billion in 2008.

Mack recruited Gorman from Merrill Lynch & Co. in 2005, just a few months after Merrill’s then-CEO, Stan O’Neal, moved Gorman away from the private-client group and into a strategy job that gave him no responsibility over revenue.

At Morgan Stanley, Mack put Gorman in charge of the brokerage division and made him co-head of strategic planning at the firm. Gorman and Walid Chammah, who ran institutional securities, were named co-presidents in November 2007, when Mack ousted Zoe Cruz following trading losses. Gorman reported to Cruz when he first joined the firm.

Dean Witter Legacy

Morgan Stanley gained its retail brokerage, which it calls global wealth management, when the company combined with Dean Witter, Discover & Co. in 1997. When Dean Witter CEO Philip Purcell was ousted in 2005, Morgan Stanley’s retail brokerage produced only a quarter of the profits of Merrill’s sales force, where Gorman had helped double profit margins by eliminating less-productive brokers, closing some branches and focusing on the wealthiest clients.

When Gorman started at Morgan Stanley in February 2006, the firm had about 9,000 financial advisers producing an average annualized revenue of $554,000. Gorman reshaped the business by jettisoning brokers who were less productive and hiring top producers from rivals.

By the end of August 2008, Gorman had whittled the corps of advisers down to 8,500 and raised revenue per representative to $741,000. The firm also almost doubled the assets it managed from the wealthiest customers, those with $10 million or more, to $223 billion from $129 billion. Asset values and revenue per adviser fell in the last quarter of 2008 as markets tumbled.

Revenue Contribution

Global wealth management contributed 28 percent of the firm’s revenue in 2008, up from 21 percent in 2005, according to company reports. The division’s 2008 pretax profit of $1.15 billion was more than double its 2006 level and surpassed the contribution from the asset-management division. Still, its revenue and pretax income in 2008 was less than half of that provided by institutional securities.

Before joining Merrill Lynch as an executive vice president and chief marketing officer in 1999, Gorman was a senior partner in the financial services group of New York-based consulting firm McKinsey & Co., where he advised clients including Merrill.

“He’s very well respected on the Street,” said Ada Lee, an analyst at Sterne, Agee & Leach Inc. in New York. “With his experience he could actually turn the Morgan Stanley-Citi brokerage into more of what was once upon a time a U.S. Trust or Northern Trust type brokerage, which is a lot less focused on your average Joe.”

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: January 11, 2009 20:10 EST