Morgan Stanley Wealth Profit Zooms on Advisory Fees
Morgan Stanley executives on Tuesday exulted in the success of the company’s strategy of selling loans and fee-based accounts to the very wealthy, saying it strengthens client “stickiness” to the firm rather than to individual brokers and drove record wealth management revenue and profit in the third quarter.
Wealth management fueled almost 46% of the New York-based bank’s total revenue and 45.0% of its pretax net income in the quarter, with the division’s profit rising 24% from the third quarter of 2016 to $698 million.
“Clients are attracted to the value proposition of a managed account, and we see that trend continuing,” Chief Financial Jonathan Pruzan said on an earnings conference call, citing a 12% year-over-year jump in advisory and related fees to $2.4 billion. Underlying fee-based assets grew because of market gains and the addition of $15.8 billion to advisory accounts.
Client assets in fee-based accounts rose 17% to a record $1.00 trillion as of September 30, or about 43% of total wealth management account assets. Merrill Lynch said last week that the $1.04 trillion of assets that its wealth customers kept in fee-based accounts represented 48.3% of their total assets, near equilibrium with money kept in traditional commission accounts
Morgan Stanley has been a leader in promoting “managed” advisory accounts rather than traditional commission-based trading ideas as a stabilizing source of revenue to counteract volatile investment banking and trading income. The years-long project requires many of its almost 16,000 brokers who were trained in offering trading ideas to modify their behavior.
The New York-based investment bank also has been urging brokers to sell mortgages, portfolio-backed loans and customized credit products to the very wealthy, a project that it says will generate even greater income as interest rates rise, while also tying customers more deeply to the bank.
Client liabilities related to banking products and traditional margin lending grew 11% to $78 billion as of September 30 as Morgan Stanley pushed brokers to catch up with the lending engines of Merrill Lynch Wealth Management, Wells Fargo Advisors and UBS Wealth Management Americas, which are owned by commercial banking behemoths.
Chief Executive James Gorman made no bones about the value of the credit products, telling analysts Tuesday morning that he recently talked to a “multi-hundred-million dollar” client who had no intention of following his advisor who had jumped to another firm.
The client had a big loan with the bank, and indicated in a follow-up call that he was likely to borrow more.
“The lending side provides a lot of stickiness with relationships,” Gorman said.
Sophisticated wealth clients often have large illiquid positions and concentrated stock positions that also lock them into the bank, he said.
Morgan Stanley ended the third quarter with 15,759 brokers, down a net 18 over the previous three months and 98 over the year, but still representing the largest U.S. brokerage force.
Merrill Lynch’s broker count of 14,954 at quarter’s end was up a net 286 brokers from a year earlier. Morgan Stanley’s average broker was producing $1.07 million in fees and revenue annually compared with $994,000 for Merrill’s advisors, the companies said.
Morgan Stanley’s wealth management division reported a pretax profit margin of 27% in the third quarter, up from 25% in the second quarter and 23% 12 months earlier. Gorman, who ran wealth management when it was running at single-digit profit margins in the aftermath of the financial crisis of 2008-2009, waxed enthusiastic about the unit’s management.
“The team took a business that was really on its heels, performing really well across the franchise,” he told analysts, adding that he has no plans to up the margin target despite the likelihood that revenue will continue to grow faster than expenses. He referred specifically to the fact that compensation costs stemming from “stay” bonuses to Smith Barney brokers are nearing maturity.
“With retention deals off and [interest] rates going up we should be able to bring them higher,” Gorman said about the profitability metrics, “but I’m as much focused on total growth as on incremental margins in a quarter.”
Morgan Stanley as a whole reported earnings of $1.8 billion in the third quarter, or 93 cents a share, handily beating analysts’ consensus estimate of 81 cents a share.