Morgan Stanley Q3 Profit Falls on Higher Comp Expenses, Lower Interest Revenue
(Story updated with data on new client assets in eighth paragraph, and on average broker production in last paragraph.)
Morgan Stanley’s wealth management business on Thursday reported third-quarter pretax net income of $1.1 billion, down 2% from the second quarter and 10% from the year-earlier period as higher expenses and lower interest revenue weighed on what executives said were strong asset flows and significant increases in bank lending and deposits.
Non-interest expenses, led by a 14% year-over-year jump in compensation costs, rose 13% from a year ago but were flat with this year’s second quarter at $3.5 billion. Compensation and benefit costs represented 58% of the wealth unit’s net revenue, up from 54% in the comparable third quarter of 2019.
Non-compensation expenses increased from a year ago primarily due to a $60 million regulatory charge in the third quarter and early integration expenses related to Morgan Stanley’s acquisition of E*TRADE two weeks ago, despite lower spending on business travel and entertainment.
Pretax net income in the wealth unit of $1.1 billion represented 32% of Morgan Stanley’s pretax profit while its expenses were 43% of the total company cost base.
Morgan Stanley Chairman and Chief Executive James Gorman championed the continuing importance of the wealth business, which he supercharged in 2009 with his joint venture with, and ultimate acquisition of, Smith Barney. He cited client loans balances that grew 6% during the quarter and 16% from 12 months earlier to $100 billion, as well as soaring new money from customers.
“This is the healthiest I have seen this business in the 14 years I have been here in terms of fee-based flows and actual flows,” he said on a conference call with analysts. Fee-based client assets of $1.3 trillion at Sept. 30 were up 12% and 8% from the year-earlier and sequential quarter, and new money, or flows, into fee accounts were up 54% and 114%, respectively, to $23.8 billion.
New customer assets are on pace to grow by about $150 billion this year, or 5% of existing assets, up from about $100 billion of new money, or 4%, in 2019, according to people familiar with Morgan Stanley’s strategies. “Choppy, difficult markets are an advantage to us,” one of the officials said. “In flat markets, people ask why they need to pay for advice.”
Bank of America earlier this week said third-quarter net client flows of $1.39 billion at Merrill Lynch Wealth Management and its private bank were 75% lower than money attracted in last year’s third quarter, while third-quarter revenue at Merrill was down 7.5%.
Recruiting of advisors, which Gorman restarted this year after a multi-year budgeting pause, is very strong. “A lot of very wealthy clients are validating the model,” the CEO said.
Morgan Stanley added 70 wealth management reps, net, during the quarter. Its total of 15,469 advisors—higher than other wirehouses—is down 84 from Sept. 30, 2019, but Gorman said the net recruiting gap is narrowing because of lower attrition of advisors. “If people aren’t leaving,” he said, “by definition you’ll be growing.”
Average per broker annualized production rose 8% in the third quarter to $1.20 million from $1.11 million a year ago, and was about flat with second-quarter 2020 metrics. Merrill said its brokers recorded annualized third-quarter production that rose 3% to $1.12 million from the year-earlier quarter and from this year’s second quarter.