The business, the result of a 2009 combination of Citigroup's (>> Citigroup Inc.) Smith Barney and Morgan Stanley's (>> Morgan Stanley) retail brokerage into an operation that now employs nearly 17,000 advisers overseeing $1.7 trillion in assets, transferred Smith Barney brokers to the new system in three waves this year.

The platform - called "3D" in a nod to its "multidimensional design" - is intended to let the firm's army of brokers do everything from trading stocks and picking fund managers to helping clients manage their risks. Morgan Stanley promised brokers a state-of-the-art system that would combine the best of both firms and enable advisers to give the most insightful financial advice in the business.

The three-year integration of the businesses has largely been completed, but the finished system is disappointing to many brokers, according to interviews with a dozen current and former employees of the firm.

In perhaps the most serious malfunction so far, certain option and derivative trades did not require some brokers to post margin for at least two days in early July, two brokers said. Margin is collateral that investors must post against some trades that carry a high risk of loss.

Morgan Stanley's troubleshooting team resolved the issue by the third day, and in the meantime, supervisors told brokers to post margin as they ordinarily would, the brokers said. They said the firm did not give any official guidance on how to proceed during the days without margin requirements.

Morgan Stanley denied there had been a problem with the system for posting margins.

Some brokers said they have also had troubles with foreign currency transactions, changes to client account numbers, slower trade processing, delays in delivering funds to the proper client accounts and, at times, system outages. The problems can be costly as the firm has been compensating some customers for delays and staff morale has suffered in some areas.

The complaints come at a sensitive time for the brokerage industry. Costly technology glitches at the Nasdaq stock exchange during Facebook Inc's (>> Facebook Inc) trading debut in May, and this week at trading firm Knight Capital Group Inc (>> Knight Capital Group Inc.), have heightened concerns about whether risk management can keep pace with technology.

Morgan Stanley's wealth management business, meanwhile, has performed poorly against expectations because of a tough investing environment and integration issues. Revenue in the bank's brokerage division fell 4 percent in the second quarter and the 12 percent pretax profit margin is still short of the firm's "mid-teens" target.

Morgan Stanley expects to reach its performance goals by the middle of next year, once integration costs of $80 million to $100 million per quarter, for such things as the new platform, go away.

But while the firm accepts that the platform's arrival had not gone completely smoothly, it says its introduction was essential.

OBSOLETE

The bank also disputed brokers' assertions about slower trade settlement times, and said there have been no system outages as a result of the technology change. And some of the firm's brokers also say that despite growing pains they prefer the new platform to the old.

"This was the largest technology conversion ever in this industry, and some rough edges were inevitable," Morgan Stanley spokesman James Wiggins said in a statement.

The old Smith Barney mainframe computer setup was obsolete, Wiggins said. "The advantage of a modern Web-based platform is that we can make improvements more quickly and change things (financial advisers) don't like."

The firm will keep making improvements to both the technology and operating procedures, he said.

It has launched an internal campaign called "We Hear You," encouraging brokers to register complaints related to the 3D rollout.

Morgan Stanley CEO James Gorman told analysts last month that the transfer of brokers onto the 3D platform was nearly complete and that the business was running smoothly. "We can now finally look forward to the benefits of a fully harmonized business with significant scale," he said.

Merging technology systems is never easy. Incompatible systems have to be combined and thousands of brokers - who are trying to serve clients and are accustomed to their old, familiar system - have to be retrained.

"This is like Sisyphus, pushing the boulder up the cliff," said Colin Clark, a developer at technology consulting firm Cloud Event Processing, which works with top Wall Street banks on such issues. "These are huge systems impacting thousands of people - it's just a monstrous, multiyear process with so much risk because so many things have to go right, in the right sequence at the right time."

Screw-ups, he added, are inevitable.

Major problems, though, should be ironed out by the time new software is rolled out to brokers, said Eric Scott Hunsader, founder of trading software and technology firm Nanex.

HONOR SYSTEM

But there have been myriad issues, and some incidents have been costly.

In one recent instance, Morgan Stanley suffered a $15,000 expense when an important client's request to sell a falling stock took several hours to complete because of system errors, a broker said. The firm agreed to make up the difference for the client, who had threatened to take his business elsewhere.

Transactions that previously took one step on the Smith Barney platform now involve six-to-eight steps, two brokers said, slowing their ability to perform trades or gather information for clients.

In some cases, trades or fund transfers that used to take minutes or hours have taken days to complete, including transfers from money-market funds to checking accounts so clients can pay bills, several brokers said.

As a result, Morgan Stanley Smith Barney has been writing letters to landlords and covering bounced checks to retain angry clients who threatened to take their business elsewhere, said one broker. He estimated his branch spent tens of thousands of dollars on such fees in the past month.

Morgan Stanley said it could not comment on such matters without knowing specific details of the brokers and clients.

The margin problem has triggered some angry comments. At a staff meeting last month in one New York office an exasperated broker stood up and said he could have "bankrupted" the firm by placing huge bets without sufficient margin, said one broker who was present. Morgan Stanley said that would not be possible because no single broker manages enough money or takes on enough risk to bankrupt the entire firm.

The size of the trades involved and the extent of the potential risk if margin wasn't posted weren't clear.

Another broker said supervisors told staff to use the "honor system" until the margin requirement was fixed by voluntarily posting whatever margin would ordinarily be required by the firm's risk managers. It was not clear whether brokers were doing so, he said.

A number of brokers, other employees, and consultants who talked to Reuters said the problems are troubling, particularly since Morgan Stanley had already completed two other waves of technology conversions before the latest took effect on July 9.

"This is either stupidity or mismanagement, either one of which is very scary," said one broker.

ROLLS ROYCE

Within Morgan Stanley, not everyone is negative on the changes.

Phil Zaczek, a Chicago-based Morgan Stanley Smith Barney adviser who spoke to Reuters at the firm's request, said the 3D system incorporates functions like contact management, looking up securities and executing trades, which previously required separate applications on the old Smith Barney platform. "I think it's light years ahead of what we used to have," said Zaczek, a former IT executive.

He said the complaints from others likely stem from the difficulties of navigating a new and different system, not from any actual problems.

Joe Cervantes, a Morgan Stanley Smith Barney adviser in Los Angeles who also spoke to Reuters at the company's request, said: "It's a Rolls Royce and the Smith Barney system is a Buick."

Two other brokers who spoke to Reuters independently also said they had no major issues with the new platform.

GROWING PAINS

The problems with the platform come at a time when Morgan Stanley, which now owns 51 percent of the joint venture, is currently battling with Citigroup over the price it will pay to buy an additional 14 percent stake in Morgan Stanley Smith Barney. Morgan Stanley has indicated it values the whole venture at around $9 billion, while Citigroup says it is worth $22 billion.

Morgan Stanley has said it initially thought it could swiftly move sophisticated tools and features from Smith Barney's server-based platform onto its Web-based system. As it began testing the technology, it became clear the rollout would take longer and cost more than expected.

The project hit its first snag last year when technicians attempted to put Smith Barney's lucrative managed-funds business onto the 3D system. Technical failures led management to slow down the integration process and perform additional testing, executives have said.

Recruiter Danny Sarch of Leitner Sarch Consultants, said Morgan Stanley brokers contacting him about jobs have cited technology issues as one reason they want to leave Morgan Stanley Smith Barney. Broker complaints range from delayed fund transfers to the disappearance of client birthday reminders and other alerts that had been stored on the old Smith Barney system, he said.

"The firm painted a picture of a brighter future," said MarketCounsel managing director and Brian Hamburger, a lawyer whose firm advises big-firm brokers leaving to launch independent businesses. "But as this system has been launched, it's been underwhelming."

(Additional reporting by Jessica Toonkel and Jennifer Cummings; Editing by Lauren Young, Jennifer Merritt, Prudence Crowther, Martin Howell)

By Lauren Tara LaCapra, Joseph A. Giannone, Ashley Lau