Morgan Stanley Brokers Excite CEO with $1 Billion-Quarter
Morgan Stanley executives gave themselves hearty back-pats on Wednesday for their decision to make wealth management a key part of the company’s business.
The New York bank’s wealth management unit posted over $1 billion in pretax quarterly profit for the first time since Chief Executive James Gorman’s decision in 2009 to create a joint venture with, and eventually acquire, Smith Barney, executives said on Tuesday.
The strong second-quarter results came courtesy of strong fee-based asset growth and progress in getting advisors to extend loans to their prosperous clients.
“Those are good trends that will drive asset-based fees and net-interest income,” Morgan Stanley’s chief financial officer Jonathan Pruzan said in a conference call with analysts. “We remain optimistic about the allure of this business.”
The wealth unit in the early days of the post-Smith Barney merger was making $1 billion annually, not quarterly, Gorman said on the call. He contrasted its steady contributions to the bank’s more volatile trading and investment banking activities.
“The wealth management business is almost like a yield stock,” he said, noting that the company’s growing ability to satisfy its investors with dividend increases is coming out of the unit.
The division’s $1.057 billion in second-quarter pretax profit was up 23% from $859 million in last year’s comparable quarter, and translated to a pre-tax margin of just over 25%. That’s higher than the company’s target range of 23% to 25%. (Bank of America on Tuesday reported a pretax margin of 28% in its global wealth and investment management division.)
The firm’s almost 16,000 brokers generated $4.15 billion in revenue in the quarter, up 9% from last year. Wealth management contributed 43.7% of the New York-based investment bank’s total net revenue of $9.50 billion in the quarter and 46.6% of its pretax income of $2.64 billion. That compares with 41.6% and 34.6% of revenue and pretax profit in this year’s first quarter.
Fee-based asset flows continued to fuel weath revenue while commission account revenue idled. Customers added $19.9 billion to advisory accounts during the quarter—up 66% from $12 billion a year earlier—while commission revenue was virtually flat from a year ago at $424 billion.
Retail brokerage customers, like institutional customers, have subdued their first-quarter optimism, Pruzan said, resulting in fewer transactions in the quarter. The slowdown is likely to continue due to typical summer doldrums and concerns about political gridlock over tax and regulatory reform, he said.
Morgan Stanley’s focus on advisory account fees and loans to offset transactional volatility is widespread. Bank of America on Tuesday said its more than 15,000 wealth advisors at Merrill Lynch and U.S. Trust generated $28 billion of new fee-based assets across its wealth division in the April-June quarter.
The Department of Labor’s new fiduciary rule has contributed to firms’ push to have brokers convert customers from commission to fee-based accounts to avoid conflict-of-interest charges regarding high-commission product sales. The majority of new assets generated at Morgan Stanley in the quarter came outside of retirement accounts, Pruzan said, characterizing the flows as an endorsement of the “enhanced service levels of fee-based offerings.”
The firm’s brokers are closing the bank product gap with competitors, the CFO said. Sales of securities-backed loans, tailored loans and mortgages rose 12% in the quarter to $77 billion from $69 billion a year ago, fueling a 21% jump in net interest income to $1.114 billion.
Morgan Stanley’s broker count of 15,777 as of June 30 was at the same number as three months earlier but down by 132 from a year ago. Average annualized revenue per broker jumped 10% from a year ago to $1.052 million. Merrill Lynch said its14,811 brokers averaged annualized fees and commissions of $1.040 million based on second-quarter production.
Like Merrill and UBS Financial Services, Morgan Stanley has cut its budget for recruiting experienced advisers. Morgan Stanley’s compensation-related costs in the wealth unit of $2.3 billion came in at 55% of revenue, better than its 56% expense target. Comp expenses are likely to continue to decline with the expiration of Smith Barney retention packages in January 2019 and lower recruiting, Pruzan said.
The company’s better-than-expected overall results stimulated a 3.3% rise in the compans stock price on Wednesday.
—Jed Horowitz contributed to this story.