Morgan Stanley Sees Higher Wealth Profitability After Strong Quarter
(Corrects client assets to $2.7 trillion, not $2.7 billion, in eighth paragraph.)
Morgan Stanley Wealth Management’s revenue and profit grew 11% and 16%, respectively, in the fourth quarter, prompting company executives to raise profit margin goals for the unit.
The wealth business contributed 41.2% of Morgan Stanley’s 2019 net income and 42.9% of its revenue, and its profitability will grow by broadening its client base to the mass affluent through workplace plans and expanding fee-producing assets in advisory accounts—not by cutting broker compensation, according to executives.
The wirehouse, whose broker count fell by 226 over the past year to 15,468, raised revenue thresholds advisors must hit in 2020 to earn the same payouts as in 2019, but Gorman said the move was not motivated by the bottom line.
“We’re not using the grid to drive margins,” he said on a conference call when an analyst questioned whether the controversial change presaged more compensation compression. “We use the grid to drive behavior to help us do a better job with our clients …The best advisors embrace that and we’ve had great stability among the best advisors as a result of that.”
The 2020 threshold grid changes are “modest,” Gorman said, but represent a decade-long behavioral process that has “professionalized” and “transformed” advisors who now offer fee-based accounts and other valuable tools to their sophisticated, wealthy customers.
The proof for Morgan Stanley and its shareholders is in advisor production, he said. The average broker generated $1.18 million of revenue in 2019, up 12% on an annualized basis from their fourth-quarter 2018 production and from what Gorman said was about $300,000 when he took the reins about a decade ago.
Total client assets within the wealth management division rose 17% from a year ago to $2.7 trillion, largely reflecting market appreciation. Loans and other client “liabilities” that wirehouses have been urging brokers to sell to rich customers were up 8% to $90 billion as of yearend 2019.
Net new money flowing into advisory accounts soared 54% to a record $24.9 billion from $16.2 billion in the fourth quarter of 2018. That reversed a 4% decline of flows into fee-based accounts in the third quarter of 2019. Total customer assets in advisory accounts of $1.27 trillion represent 47% of client assets, up from 40% at the end of 2015, and should top 50% within the next few years, the company said.
Overall revenue at Morgan Stanley Wealth Management reached a fourth-quarter record of $4.58 billion, up 11% from a year earlier when markets were plunging.
Pretax profit in the quarter rose 15% in the wealth unit to $4.8 billion, while total expenses were up 9% to $3.4 billion.
Compensation and benefits, the biggest retail brokerage expense item, rose 13% from the year-earlier fourth quarter to $2.59 billion.
Compensation expense was fattened by a $37-million severance cost in the quarter that was not related to an advisor or manager. Morgan Stanley also allocated costs for what it called an “employee action” to its institutional division ($124 million) and its investment management division ($11 million). A company spokeswoman declined to elaborate on the charge.
Shares of Morgan Stanley were changing hands up 7.9%, or $4.21 a share, at $57.15 in early afternoon trading on Thursday on the New York Stock Exchange.