Morgan Stanley books record numbers for wealth management

Morgan Stanley books record quarter and year for wealth management

January 17, 2023 7:16 PM

Morgan Stanley agreed to sell a business that administers its alternative investment feeder funds to iCapital, a financial-technology firm run by a former Goldman Sachs banker.

Wealth management had a record fourth quarter and year at Morgan Stanley, which otherwise reported a sizable fall in profits on Tuesday as investment banking revenue took a hit from the slowdown in deals last year.

The wirehouse bank, one of the biggest players in wealth management, beat revenue expectations for the quarter at $12.75 billion, slightly up from projected revenue of $12.6 billion. It also slightly beat expectations on adjusted earnings per diluted share of $1.31, up from the analyst consensus of $1.25.

For the full year, the bank reported net revenue of $53.7 billion, a 10% fall from $59.8 billion in 2021. Full-year profits of $11 billion plunged 27% from $15 billion in 2021.

The silver lining was the bank's wealth management side, which reported full-year revenue of $24.4 billion, a record high and a 1% bump from $24.2 billion the year earlier. The all-important wealth management business had $5.1 billion in full-year profits, up 9% from $4.7 billion in 2021, and added $311 billion of net new assets in the year.

"The firm did what it was supposed to do with our most stable Wealth and Investment Management businesses, offsetting declines in Institutional Securities," CEO James Gorman said during a call with analysts Tuesday.

"This is hard evidence of the transformation we've made to become increasingly durable."

Gorman reiterated his plans to bring the company to $10 trillion of client assets in coming years, projecting that with a current $5.5 trillion, the bank was on track to land $1 trillion in net new assets every three years. By that math, the company would reach the $10 trillion mark in roughly 12 to 15 years.

Gorman said the income generated from those higher assets in the combined Wealth Management and Investment Management units, estimated at over $14 billion of pre-tax profits, would exceed the entire firm's pre-tax profits in 2022.

In response to an analyst question about which wealth management channels would grow the most, Gorman said that all three — the employee advisor channel, workplace channel and self-directed — would be important. But he added that he expected the workplace channel to lead growth as a kind of "sleeper" unit.

"I truly believe that the workplace employee, the retirement space, is sort of the next frontier, and we're right in the middle of that," Gorman said. "They're probably margin accretive in reverse order. In other words, workplace first, the direct second and the advisor third," he said.

The retirement landscape the Wall Street bank is tackling has undergone a massive shift in recent decades.

In the past, "people could live off the yield of their portfolio," said Colleen Jaconetti, a senior manager at Vanguard's Investment Advisory Research Center who specializes in researching retirement planning and behavioral coaching for advisors.

Yields could easily be as high as 5-7%. "So retirees didn't have to think about how to fund their retirement spending."

Now, with the market downtown creating investment yields below the amount needed to safely withdraw a recommended 4% from portfolios in retirement, it's gotten more difficult.

"People are living longer. So they have to maybe save more or retire later, and then they have complicated systems on when to take Social Security," Jaconetti said. "There is a huge opportunity for advisors to help retirees."

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To see the main takeaways from Morgan Stanley's fourth-quarter earnings, scroll down the slideshow. For coverage of the firm's third-quarter earnings, click here. For a look at the results from the second quarter, click here.

Financials

Profits in the fourth quarter fell 40% to $2.2 billion from $3.7 billion year over year, according to an earnings release. They were also down 15% from $2.6 billion in the third quarter. The investment banking and trading unit was hit particularly hard with a loss of 70% year over year in profits, and a 49% fall in profits from the quarter before.

Overall revenue in the fourth quarter fell 12% to $12.7 billion from $14.5 billion year over year, and was down 2% from the previous quarter's $13 billion.

However, wealth management had a record quarter with $6.6 billion in revenue compared with $6.3 billion a year ago, an increase of 6%. Quarterly profits in the wealth unit popped 33%, according to an earnings supplement.

Client assets

Total client assets fell to $4.2 trillion in the Wealth Management unit, down 16% year over year from $5 trillion. Fee-based client assets in the unit also fell 9% to $1.7 trillion from $1.8 trillion the year before as clients' portfolios declined with the markets.

However, the wealth channels offset this with higher net interest income of $2.1 billion — a 52% growth year over year from $1.4 billion — from more lending activity as well as higher interest rates. The wealth business also added $51.6 billion in net new assets in the quarter. U.S. bank loans grew 13% and deposits grew 1%, respectively, year over year.

"What we've seen with the deposit base is that we have many channels, i.e. savings, for example, where we can begin to get those deposits and attract new deposits to the institution and to the bank from other sources, external assets held away that come in," said chief financial officer Sharon Yeshaya.

Expenses

In the fourth quarter, total non-interest expenses of $9.9 billion jumped 2% year over year for the company from $9.6 billion.

"The full year results included $470 million of integration-related expenses, of which $120 million were incurred in the fourth quarter," Yeshaya said.

The company set aside $87 million in provisions for credit losses to prepare for an anticipated economic downtown this year, up from only $5 million at the end of last year.

It noted in its press release that the December layoffs of around 2% of its global workforce incurred a large severance payout of $88 million, on top of "higher salary expenses."

Although the company no longer gives financial advisor headcount metrics, Gorman remarked during the call that Morgan Stanley employs around 15,000-16,000 wealth advisors.

The press release noted that in the wealth unit, "compensation expense decreased from a year ago driven by lower compensable revenues" but the firm had paid higher salaries to recruit more advisors and had high bonuses to pay out as part of deferred compensation packages, while non-compensation expenses grew over the previous year "primarily driven by investments in technology, as well as higher marketing and business development costs."

Remarks

Gorman said he expected wealth management, which appears to be his favorite child among the business units, to contribute an increasingly bigger portion to the company bottom line. In line with that, he pointed to the company's pattern of acquiring wealth-related businesses — including, recently, Solium, E-Trade and Eaton Vance — and of dumping lines deemed less central to its wealth-focused core strategy. In prior years the bank spun off credit card brand Discover and sold oil company TransMontaigne, among other exits.

"While we may facilitate activities across varied markets, we do not own businesses that are built around unsecured consumer credit, payments, physical handling of commodities and the like," Gorman said. "Instead, we focus on markets we know best, and our ability is there to support our clients in those markets."

Gorman remained optimistic about the markets in the medium term. "I'm not talking about the first quarter or two," he said, but he added that beyond that, "I see the Fed's move from 75 to 50 likely to go to 25" basis points when hiking interest rates.