Morgan Stanley (NYSE: MS) Chief Executive Officer John Mack will step down and be replaced by Co-President James Gorman, who has been running the company’s brokerage and overseeing its merger with Citigroup Inc.’s (NYSE: C) Smith Barney unit.

The 64-year-old Mack will remain as Morgan’s Chairman when Gorman, 51, takes over the CEO post on January 1, the company said.

Mack came under criticism as he scaled back Morgan’s risk profile even as rivals like Goldman Sachs Group Inc. (NYSE: GS) regained momentum as the worst economic downturn since World War II began to wane, according to the Associated Press.

“Gorman has really earned his stripes,” Anton Schutz, president of Mendon Capital Advisors Corp., which owns Morgan Stanley shares, told Reuters. “He did a great job at Merrill, he’s doing a good job at Morgan Stanley, and the timing for a

Today we are featuring "financial equity" mutual funds, which invest at least 50% of their assets in financial services and related companies.

Investors can find such funds by checking out the Zacks #1 Rank Financial Equity Funds list.2 Solid Picks

FBR Small Cap Financial (FBRSX) invests at least 80% of its assets in securities of small-cap companies with market capitalization of less than $3 billion. The fund focuses on companies that invest in real estate, usually through mortgages or other consumer-related loans.

Since its inception in December 1996, this Zacks #1 Rank fund has been managed by David Ellison of FBR Fund Advisers Inc. Previously, Ellison was a portfolio manager with Fidelity Investments. The fund distributes dividends and capital gains annually. As of January 2009, its portfolio turnover was 147%.

Investors have to make minimum

Financial stocks continue to take a beating, but Anton Schutz, portfolio manager of Mendon Capital, sees opportunities in financials with “too much capital.”

His first pick is holding company TFS Financial

“TFS buys back a tremendous amount of its own stock,” Schutz said. “Its got excess capital…so its open for business, lending money…and taking advantage of the disruption out there.”

Schutz also likes Lazard 

“There’s going to be a lot of corporate restructuring, as well as more work in financial M&A, so I think Lazard is poised to benefit here without risking its balance sheet.”

Track Anton Schutz’ picks at:

http://trackthepros.com/stocks/category/1572