Morgan Stanley Q3 wealth earnings rise with interest rates

Morgan Stanley adds $65B in client assets toward $1T goal

October 17, 2022 5:39 PM

Morgan Stanley CEO James Gorman predicts investors will get clarity about the timing of inflation slowing down by the middle of next year.

The megabank's chief made the remarks on Oct. 14 in a call with analysts after the firm disclosed its third-quarter results. Despite the economic concerns surrounding inflation and the stock slump of recent months, Morgan Stanley's Wealth Management division raked in higher earnings because of rising interest rates, growing loan balances and tens of billions of dollars in net new assets. Gorman's views of the economy diverged slightly from more upbeat comments by rival CEOs that day on earnings calls held by J.P. Morgan Chase and Wells Fargo.

Gorman gets "surprised every time I see somebody on TV who seems surprised by it," he said of the stock slump and larger economic worries. Russia's invasion of Ukraine, the highest inflation in 40 years, fiscal stimulus relief for the pandemic and — prior to the Fed's recent hikes — zero interest rates for most of the prior decade made them inevitable, Gorman said. Like other experts, he criticized the Fed for how long the central bank took to raise interest rates.

"With that, there will be consequences. We haven't seen clarity around inflation abating," he said, according to a transcript by Seeking Alpha. "My guess is that we will see that clarity, and it will be more evident certainly by the middle of next year. … You're going to see some disruption. We're seeing it."

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To view the most interesting wealth management takeaways from Morgan Stanley's third-quarter earnings, scroll down the slideshow. For a look at the wirehouse's second-quarter results, click here. To see coverage of Morgan Stanley's first-quarter earnings, follow this link.

Note: Unlike rivals such as J.P. Morgan Chase and Wells Fargo, Morgan Stanley doesn't disclose its exact headcount. Recruiting firm Diamond Consultants estimated the wirehouse had about 16,000 advisors at the end of the second quarter.

Client assets

The recent stock slump exacted a toll on assets across Morgan Stanley's advisor-led and workplace channels, as well as the self-directed customers of subsidiary E-Trade Financial. Advisor-led client assets slipped 9% year over year to $3.31 trillion, with advisory holdings falling by 7% to $1.63 trillion. Across all three channels, client assets tumbled 11% to $4.13 trillion.

Net new assets

Morgan Stanley's wealth management arm added $64.8 billion in net new assets for the quarter, which was less than half of the same time a year ago. For the year, though, the firm has tacked on $260 billion due to recruiting gains, stock plan vesting, inflows into E-Trade and organic growth among its base of advisors. The albeit lower inflow to the wealth manager during the quarter came "from different parts of the funnel" across the firm, Chief Financial Officer Sharon Yeshaya said. The company is focusing on converting its E-Trade and workplace customers into wealth management clients through new digital methods identifying and pitching the services.

"It is pretty remarkable to see $65 billion of assets in a quarter such as this one," Yeshaya said. "We're beginning to see more and more referrals and more and more anecdotes and stories where you actually see the assets that are coming through the advice-based channel are actually coming through different referrals that we might have seen from the actual workplace relationships."

Revenue sources

Net interest income soared 49% year over year to a little more than $2 billion due to the higher rates pushing up the firm's yields. Bank loans also jumped 20% to $145.7 billion. On the negative side, however, asset management revenue decreased 7% to $3.39 billion and transactional sales tumbled 18% to $616 million. Lower client activity during the economic turmoil, as well as sinking stock values, offset the positive asset flows, according to the firm.

Expenses

Non-interest expenses ticked up 1% from the year-ago period to $4.46 billion in the third quarter, as compensation costs remained roughly flat. Despite a higher headcount of employees and advisors of an undisclosed size, Morgan Stanley took in lower compensable revenues and saw a decline in the value of certain deferred employee plans tied to stock values. Other types of expenses rose 3% to $1.29 billion due to spending on technology, marketing and advisor recruiting.

Remark

Gorman echoed comments made last month by Head of Wealth Management Andy Saperstein, sharing the company's goal of adding $1 trillion in client assets every three years. The firm's CEO outlined what that target means to Morgan Stanley's business over the long term. To achieve that level of growth, Morgan Stanley would need to add $330 billion in net new assets per year. In fact, Gorman aims for the firm to reach $10 trillion in client assets, using the estimate that an average fee of 50 basis points would generate business of $50 billion a year.

"That is an unbelievable revenue machine," Gorman said. "It is a completely different business model, because of workplace, because of the direct channels, because of what we've done with the bank and the way we've changed the whole financial advisory interaction with their clients through technology."