Morgan Stanley Wealth Profit Soared 31% in Q1 Despite Fewer Brokers
(Corrects average production and client-book numbers in penultimate paragraph.)
Morgan Stanley’s wealth management salesforce shrunk by more than 100 over the past year but advisors in the first quarter helped drive an 11% jump in net revenue in the wealth unit and a 31% increase in net income over the previous year’s quarter.
Wealth management contributed 41.6% of the New York-based investment bank’s net revenue and 34.6% of its pretax income in the first quarter, the second-highest of its three businesses in a quarter when institutional trading and banking produced spectacular results.
The wealth unit’s $4.1 billion of revenue was driven by fee-based assets that climbed 16% from the first quarter of 2016 to $927 billion, due in part to rising equity markets. New fee-based assets of $18.8 billion were more than triple the $5.9 billion that brokers attracted a year ago.
Retail brokerage firms are incentivizing brokers to sell fee-based accounts that are more stable and generally more profitable than traditional commission accounts and more in tune with the Department of Labor’s fiduciary rule for retirement assets scheduled to take effect in June.
“We are optimistic about the outlook” for wealth management, Chief Financial Officer Jonathan Pruzan said on a conference call with analysts, citing both the “steady increase” in annuitized fee-based revenues and improving technology and digital delivery products that will help brokers “aggregate” customers’ assets held away from the firm and generally improve client engagement.
Broker retention rates are high, attrition is low and the retail brokerage sales environment is good “for scale players,” he asserted.
Merrill Lynch said Tuesday that it attracted a record $29.2 billion of “long-term” flows into advisory accounts in the first quarter and that two-thirds of its brokers have fee-based relationships with at least half of their customers, up from 36% five years ago.
Like Merrill and Wells Fargo, however, Morgan Stanley’s brokerage force slightly shrunk over the past 12 months. Advisor headcount was off by 111 brokers since March 31, 2016 to 15,777, but up a slight net of 14 brokers from the end of 2016.
The big firms also have been pushing brokers to sell mortgages and gather deposits from their investment customers to stabilize traditionally market-sensitive results and finance the loans. Customer loan balances in the first quarter jumped 12% from a year ago to $74 billion, goosed by higher rates and loan sales that drove net interest income up 20% to $994 million.
Pruzan said net interest income in the unit was up only modestly, however. He also defended securities-backed loans as a “good…and important product” for retail clients that helps them easily and efficiently manage liquidity without serious credit consequences to the company.
Morgan Stanley last week agreed to pay the state of Massachusetts a $1 million fine for what the state said was its aggressive promotion of securities-backed loans.
Wealthy customers’ interest in “alternative” investments were met during the first quarter by a recovery in the underwriting of structured products, he noted, playing to Morgan Stanley’s investment banking strength.
Morgan Stanley ended the first quarter with $2.2 trillion of client assets, up 4% from the end of last year and 9% higher than 12 months earlier.
The firm’s brokers produced average annualized revenue per representative of $1.03 million, 11% higher than the $923,000 average of the year-earlier quarter and 2% higher than in last year’s fourth quarter. The average broker helped oversee about $139 million of client assets, the company reported.
Pruzan said expense management will continue to be a priority for the firm and congratulated wealth management executives for being “very good at that over the course of the last several years.” Pretax margin in the wealth business, which Morgan Stanley Chief Executive James Gorman has long cited as the unit’s key metric, rose to 24% in the first quarter from under 10% when Gorman took the reins in 2010.