Morgan Stanley Q4 earnings rise on equities and flows

Morgan Stanley’s record asset flows drove 25% margin in 2021

January 20, 2022 5:41 PM

The “freakish” organic growth of Morgan Stanley Wealth Management in 2021 reached a level so high that the firm just can’t maintain it into the future, CEO James Gorman said.

The net new assets flowing into the wirehouse jumped 11% in 2021 to a record $437.8 billion, an amount prompting Gorman to point out in a Jan. 19 call with analysts that “there are a lot of asset management companies that aren't $400 billion in size.” The percentage difference between Morgan Stanley’s annual organic growth and that of the previous year rose from “the bad days” of negative figures to positive territory starting in 2012 and up to 4% to 6% in the years around its 2020 acquisition of E-Trade, Gorman noted, according to a transcript by Seeking Alpha. The massive amounts of incoming assets in 2021 eclipsed all of them.

“I don't think that's sustainable. I mean, God, I'd love it, but I don't think it's sustainable. We're not going back to 3%, 4%. I don't know if it's 5, 6, 7, somewhere in that zone. But it's going to be a very healthy growth rate,” Gorman said, predicting that the company will reach $10 trillion across its wealth and asset management arms from their current level of $6.5 trillion. “We're in that sort of, I don't know, 4, 5, 6, 7. And that's why I deliberately said in the script that it was too early to put a net new money target out there. We needed to see where this really settled.”

Wealth management

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To see the key takeaways from the earnings announcement and call, scroll down our slideshow. For coverage of Morgan Stanley’s prior quarterly earnings, click here.

Net new assets

The net new assets also included record fee-based flows of $179.3 billion. For the quarter across its advisor-led, self-directed and workplace channels, net new assets soared by 73% year-over-year to $127.1 billion. Among Morgan Stanley’s roughly 16,000 brokers, fee-based advisory asset flows surged by 57% to $37.8 billion in the fourth quarter.

New annual metric

With an eye toward future flows, the company has started reporting the share of stock plan assets that vest and stay with Morgan Stanley on an annual basis, CFO Sharon Yeshaya said in her prepared remarks on the call. The metric “will allow us to measure the potential strength” of the workplace channel to funnel more assets into the firm, Yeshaya said. The company retained 24% in 2021, up 3 percentage points from 2020 and moving toward the company’s ultimate goal of 30%.

Total client assets

Across all three channels, client assets expanded by 23% in 2021 to $4.93 trillion. In the advisor-led unit, they climbed by 23% as well to $3.89 trillion. Advisory assets under management grew by a quarter to $1.84 trillion, or 47% of Morgan Stanley’s client assets. The firm’s advisors work with 2.5 million client households. When including the other two channels, Morgan Stanley’s client base extends to 15 million relationships.

Interest rates

Morgan Stanley’s net interest income spiked by more than a third in 2021 as the wirehouse issued more than $6 billion in additional loans for the sixth straight quarter and its overall bank lending balance jumped 32% year-over-year to $129.3 billion. Low interest rates only partially offset the impact of E-Trade, the lending, higher cash sweep deposits and stronger mortgage securities prepayment. The expected higher rates will bring about $500 million in additional net interest income to the wealth manager in 2022, according to the company’s estimates.

Revenue and earnings

The wirehouse’s net revenue rose 27% year-over-year in 2021 to $24.24 billion, driven by rising equity values, record fee-based flows, the E-Trade deal, more client transactions and higher interest income. Pretax income jumped 41% to $6.18 billion, for an annual profit margin of 25%. That’s two percentage points higher than last year. Gorman has set a goal of raking in a 30% margin from the wealth manager in the future. “We don't think 30% is the ceiling. But let's run before we sprint here,” Gorman said. “There's no great magic to it. It's just the math of how we think the business plays out the next couple of years.”

Sources of NNA

An analyst asked Gorman to explain the main drivers of the wealth manager’s notable organic growth. Gorman cited the E-Trade deal, better collaboration “across the house” among different lines of business, enhanced technology, losing fewer advisors to rivals and targeting “talented people in the market” with recruiting deals. “I mean these numbers, we said ‘unprecedented’ for a reason,” Gorman said, according to Seeking Alpha. He noted the firm’s mark of 11% organic growth in 2021. “That's got to be the best in the industry, and overwhelmingly the best in our history. And it's better than, frankly, many of the traditional faster-growing, so-called faster-growing companies. So we're really excited about it. I don't think 10% or 11% is realistic to hold. But certainly we're not going back to anywhere near where we were in the old days.”