October 17, 2019
James Gorman, chairman and chief executive of Morgan Stanley. Andrew Burton/Getty Images
Morgan Stanley on Thursday reported a 2.3% jump in third-quarter earnings on trading and investment banking revenue that beat analysts’ expectations, while revenue at its big wealth management sector fell slightly short of their forecasts.
Net revenue in the unit dropped about 1% from a year earlier (and from this year’s second quarter) to $4.36 billion on reduced customer commission trading and lower net interest income, but compensation and benefit expenses were down 3%.
Total revenue in the wealth unit was just below the $4.39 billion forecast by analysts surveyed by Refinitiv.
Wealth division profits, nevertheless, rose 4% from a year earlier to $1.2 billion, and Chief Executive James Gorman indicated that the big bet he made on wealth management with the purchase of Smith Barney a decade ago is paying off.
The wealth division contributed 43% of its parent company’s quarterly revenue and 45.7% of its profit in the third quarter.
“At $2.6 trillion of assets, annualizing over $17 billion in revenues, and margins at historic highs – the business is clearly stabilizing the firm,” Gorman said at the start of his remarks on the company’s earnings call Thursday morning. “I am convinced there remain several meaningful avenues for growth.”
The biggest opportunity resides in using customer-outreach tools to convince U.S. millionaires to move more assets to Morgan Stanley, he said, but the firm is also expanding into Asia and is pleased with progress in its new workplace stock benefits venture to develop a younger generation of wealth clients. (Since buying Solium Capital in May, Morgan Stanley has added about 265 corporate clients, Chief Financial Officer Jon Pruzan said on the earnings call.)
In the just-ended quarter, however, Morgan Stanley used what Gorman called “a maniacal focus” on expenses to keep profit margin respectable. The metric inched up in wealth management to 28%, one basis point higher than in the third quarter of 2018. Compensation expenses fell 3% to $2.3 billion while non-compensation expenses were down 1% to $780 million.
Morgan Stanley said the compensation drop reflects lower broker forgivable loan expenses (largely reflecting bonuses from the Smith Barney deal ran off this year) and lower valuations of deferred compensation plan investments.
The wirehouse, the biggest by number of brokers, also said its brokerage force fell by a net 80 during the quarter and by 102 over the past 12 months to 15,553 advisors. Morgan Stanley for the past two years cut bank hiring experienced brokers from rivals and added policies to discourage defections. The pullback does not appear to be a significant expense lever, however, as the firm in recent months has re-entered the recruiting market.
Growth in customer assets at the wealth unit failed to keep pace with market gains during the third quarter, in keeping with earlier reports this week from Merrill Lynch Wealth and Wells Fargo Advisors.
Client assets at Morgan Stanley rose 3% from the year-earlier period to the $2.56 trillion referenced by Gorman, and new asset flows into the fee-based accounts that wealth firms prefer fell 4% from a year earlier to $15.5 billion.
Total asset management fees rose 3% to $2.64 billion in the wealth unit while commission revenue declined 15% from a year ago and 18% from this year’s second quarter to $595 million. Like many firms, Morgan Stanley bills on assets in advisory accounts at the end of the previous quarter.
“Transactional activity remains subdued,” Pruzan said on the earnings call, attributing it in part to seasonally slower client activity and a weaker equity-issuance calendar. “Retail investors remain cautious given the continued uncertainty around the outlook.”
He and Gorman said they are not concerned that the recent move to zero commissions by Charles Schwab, Fidelity Investments and other online brokers will influence the wealthy cohort of customers it works with to demand lower fees.
“There has been no noise from the field,” Pruzan said when an analyst asked if brokers were hearing from customers. “Our clients are looking for more than zero-dollar trades.”
Gorman said he was surprised that the discount brokers made their moves when the interest rates that drive much of their profits are so low, but not by the free-trading dynamic. Another person close to Morgan Stanley said the zero-commission decision took away some of the wind from a plan the company has to cut commission prices in its robo-advisor and call-center operations that service less affluent customers.
Shares of Morgan Stanley were up 2.3% in early afternoon trading on Thursday. The Dow Jones U.S. Financial Services Index, which includes large commercial banks and credit card companies, was up 0.33% and the S&P 500 up .26%.
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