Morgan Stanley Execs: We Like Our Broker Count—and Their Performance
Morgan Stanley executives followed up a better-than-expected quarterly earnings report on Wednesday with a self-congratulatory note on their ability to retain and motivate top advisers, in spite of the expiration of their ten-year-old Smith Barney retention bonuses.
The wealth management division fueled 42.6% of Morgan Stanley’s $10.3 billion of revenue and 40.2% of its $2.96 billion of pretax profit in the first quarter of 2019, despite wealth advisory fees that fell 5% from a year earlier in the wake of the December market turmoil.
Revenue of $4.39 billion, flat with the first quarter of 2018 and up 6% from last year’s fourth quarter, exceeded analysts’ estimates by $200 million, according to FactSet. Net income was up 2% from a year ago and 18% from the fourth quarter to $1.18 billion.
On a conference call with analysts, Morgan Stanley Chief Executive James Gorman attributed the wealth performance to “strong expense management” that helped it achieve a 27% pretax profit margin while Chief Financial Officer Jonathan Pruzan expressed satisfaction with rising average revenue production among the firm’s almost 16,000 advisers.
Gorman made a big bet on wealth management as a “scalable” generator of predictable profit to offset the firm’s volatile trading and investment banking businesses with the purchase of Smith Barney from Citigroup. On Wednesday, he noted that the hundreds of millions of dollars of forgivable loans given to Smith Barney brokers fully expired in January, adding: “By the way, I haven’t noticed any attrition resulting from that.”
It was a snipe at widespread expectations among headhunters and competitors that brokers would leave to accept new hiring bonuses once the deals were over. Morgan Stanley covered its flanks to some extent when it pulled out of the Protocol for Broker Recruiting in November 2017, making it harder for brokers to leave because of constraints on soliciting their former customers.
Morgan Stanley added a net 14 advisors over the first three months of 2019, and a modest 26 over the previous 12 months, finishing the quarter with 15,708 advisors. The net broker count was moderated by what Pruzan called an “uptick” in broker retirements that he said were “well planned for” as clients were transitioned to younger members of retirees’ teams.
Gorman talked up the firm’s pending $900 million acquisition of Solium Capital, a stock-plan administration firm that works with employees of about 3,000 mostly small companies, as a “very interesting strategic play” for developing younger customers in the workplace who can use Morgan Stanley’s call center and robo platform and transition to its full-service advisors as they accumulate wealth. The deal is expected to close in May, and will take about 12 to 18 months to integrate, the executives said.
But Gorman emphasized that the “name of the game” for Morgan Stanley’s wealth business remains its full-service wealth platform, where advisors lock in client revenue through fee-based advisory accounts, and sales of mortgages and other bank loans. (Client loan balances of $82 billion at the end of the first quarter were up 3% from the year-earlier period, as was net interest income of $1.13 billion. Securities-based loans have been very active in the first two months of 2019, Pruzan said.)
“To win in workplace and lose in the advisory is not the answer,” Gorman said. “We need to win in advisory, to crush that.”
The wealth unit as of March 31 had $2.48 trillion of customer assets, up 4% from the year-earlier first quarter, or $158 million per average advisor. Fee-based advisory assets represent 45% of account totals, as they did one year earlier.
New money flowing into wealth advisory accounts fell 9% from the fourth quarter of 2018 and by 19% from Morgan Stanley’s record first quarter of 2018 to $14.8 billion, reflecting the market turmoil of late November and October that led clients to withdraw or move from stocks into fixed income, according to the firm. A weak syndicate market also dented asset flows, Pruzan said.
The average Morgan Stanley advisor is on track to generate $1.12 million of revenue in 2019, based on first-quarter numbers, about flat with the year-earlier quarter’s annuitized number and up from $1.06 million in the fourth quarter.
“We’re happy with that,” Pruzan said, attributing some of the stability to less movement of brokers out of the firm and few hires.
“Recruiting last year was quite slow for us as we focused on digital,” he said, adding that Morgan Stanley expects “some marginal pickup” in hiring experienced brokers this year.
Recruiting, however, has not returned to the top of managers’ agendas at Morgan Stanley.
“That’s not going to be a growth target,” Pruzan said.