Morgan Stanley Focuses on ‘Wallet Share’ as Q3 Profits Rise 7%
Morgan Stanley said on Tuesday that it has seen early success in gathering more assets that wealthy clients were keeping at other firms through new customer-contact and modeling tools it is encouraging brokers to use.
The efforts contributed to a 4.2% jump in third-quarter revenue and a 7% rise in pretax profit from the year-earlier period at the New York-based firm’s wealth management division.
“The biggest opportunity long term is around asset aggregation, and our ability to attract incremental assets from our customers,” Chief Financial Officer Jonathan Pruzan told analysts after the company as a whole reported net income of $2.1 billion and earnings per share of $1.17 that beat consensus expectations.
Morgan Stanley, which has reduced its hiring of experienced brokers, will tie bonuses in 2019 to the number of customers brokers reach through financial plans, new digital contact tools and performance modeling tools across client assets in an attempt to gather and keep their assets.
“Clients are much more open to sharing their financial information with us,” Pruzan said, citing anecdotal responses to the new asset-gathering tools.
By the end of the third quarter, client assets in the wealth management unit reached $2.496 trillion, up 8% from the third quarter of 2017 and 3% from the end of this year’s second quarter. Assets in fee-based advisory accounts that brokerage firms prefer because they generate revenue regardless of customer transactions were up 12% from a year earlier (and up 3% from this year’s second quarter) to $1.12 trillion, or 45% of client assets.
While strong third-quarter equity markets helped push up the totals, new money flowing into advisory accounts rose 3% from a year ago to $16.2 billion. That contrasts with this year’s second quarter, when new customer money in fee-based accounts declined 23% from the previous year’s quarter.
Bank of America on Monday reported a 3% jump in third-quarter revenue at its Merrill Lynch Wealth Management unit, but said new money in fee-based advisory accounts fell almost 64% to $7.6 billion from a year earlier when brokers were moving retirement money out of transactional accounts that Merrill was discontinuing at the time. Morgan Stanley spokespeople said in an email that “only a fraction” of new fee-based assets came from customers’ retirement accounts.
In another growth area being flogged by brokerage firms with commercial bank affiliates, customer loan balances at Morgan Stanley grew 6% from the third quarter of 2017 to $83 billion, driven by an 11% jump in securities-based and other non-mortgage loans and 2% jump in residential real estate loans.
Net interest income, reflecting loan growth, rose 4% from a year ago to $1.1 billion, partly depressed by higher deposit and money-market rates that Morgan Stanley has been offering to wealth management customers. Pruzan downplayed the pressure of rising rates, saying very wealthy customers are not rate-sensitive and also noting that their cash balances have fallen to about 6% of their investment account assets from 8-10% over the last several years.
“We are very competitive with our primary competitors in this space,” Pruzan told analysts, “but it’s not rate sensitive.” Savings account holders move money out of deposit accounts when investment opportunities arise, he said. The company is nevertheless eager to build its deposit base to fund its lending, and will continue to offer special promotional certificates of deposit and savings rates, he said.
Morgan Stanley Chairman and Chief Executive James Gorman re-emphasized the firm’s success in attracting assets from its very wealthy customers. The firm was overseeing a little over $400 billion from customers with household accounts of $10 million or more in 2009, a metric that today tops $1 trillion. “That money is not going away,” Gorman said on the analyst conference call. “It’s extremely sticky.”
The push to reach higher-income clients is not coming from what Gorman called “big-ticket recruiting” that the firm has backed away from. “The annual nut from recruiting expense is coming down each year,” he said, noting that retention bonuses paid to Smith Barney brokers also mature early next year.
Morgan Stanley ended the third quarter with 15,655 “wealth management representatives,” down by 104 from a year ago but up by a net 23 brokers since the end of this year’s second quarter. The brokers are generating average annualized revenue per person of $1.13 million based on third-quarter numbers, up 5% from $1.07 million in the year-earlier quarter.