With E-Trade deal, it’s Morgan Stanley for the masses

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With $2.7 trillion in client assets and 15,500 financial advisors, Morgan Stanley was already a big player in wealth management.

Now, it’s about to get a lot bigger.

The wirehouse is buying E-Trade Financial for $13 billion, extending its reach in stock plan administration, online brokerage, digital banking and more. Combined with last year’s acquisition of Solium, Morgan Stanley executives have staked the firm’s future growth on a blend of digital and human advice delivered from cradle to grave.

“We can serve client needs at any stage of life. At home, at work, and in any channel they want to be served,” says a person familiar with the matter who asked not to be named in order to discuss the deal.

The wealth management business has become increasingly attractive, and the acquisition is the latest demonstration of firms merging banking, wealth management and digital services to meet clients' every financial need.

February 20, 2020 8:09 AM

“For years, it was about going upmarket but now it is about going down market,” says Dennis Gallant, an analyst at Aite Group.

The upmarket segment is lucrative, but loaded with fierce competition, Gallant says. And it’s now possible to achieve significant scale when serving smaller investors thanks to new technologies, he adds.

“We’ve never been able to compete in the direct channel,” says the person familiar with the matter. “We thought about building it, but it would have been too expensive to build. This deal makes us immediately competitive in that channel.”

Incorporating E-Trade will enable Morgan Stanley to offer clients more investment options. Indeed, some existing clients already have E-Trade accounts in addition to their Morgan Stanley accounts, executives say.

The acquisition is set to close later this year and Morgan Stanley stands to gain approximately $360 billion in retail client assets, 5.2 million accounts and $39 billion in digital banking deposits, according to the firm.

Executives note that the growth in self-directed and online platforms has exceeded that of many traditional wealth management firms. E-Trade has added 850,000 net new client accounts in the past five years, according to the company.

E-Trade’s stock plan administration business has approximately $300 billion in corporate services assets and 1.9 million accounts, according to the companies. That will enable Morgan Stanley to build on its acquisition last year of Solium, giving the wirehouse a deep well of millions of potential clients for years to come.

James Gorman, CEO of Morgan Stanley, said on conference call with analysts that his firm had “struggled for years” to improve its ability to convert stock plan clients into wealth management clients. He repeatedly praised E-Trade’s capabilities.

“They have had an absolute killer business for a long period of time,” Gorman said.

The wirehouse also gets digital technologies that would have taken it potentially years to build. In a memo seen by On Wall Street, Andy Saperstein, head of wealth management, told advisors there would be no disruption to the company’s core platform and client-facing tools.

“Over time, we will integrate the strengths of the E-Trade platform so that both clients and advisors enjoy a steady stream of enhanced functionality,” Saperstein wrote in the memo. He said the firm would work with its advisor councils to prioritize features to integrate.

“Once the deal has closed we intend to move forward with clear, transparent milestones to help you prepare both your clients and your teams to take advantage of the new feature set,” he wrote.

Of course, Morgan Stanley isn’t the only firm pursuing growth in these areas.

“Wall Street banks continue to covet Main Street customers,” says Greg McBride, chief financial analyst for Bankrate.com. “Between zero trading commissions and competitive yielding savings accounts and cash management products, the competition for consumers’ cash and investments is as fierce as ever."

Goldman Sachs is pivoting into wealth management, aiming to serve millions of mass affluent clients through Marcus and its acquisition of United Capital. The bank recently reorganized and rebranded its wealth business.

Meanwhile, Bank of America has built connections between its banking business and Merrill Lynch. It’s grown its robo advisor and Merrill Edge to serve small clients and DIY investors — and recently unveiled plans to grow its workplace financial wellness business.

Gallant describes workplace benefits as “fertile ground” for wealth managers.

“I don’t think there is one firm out there that isn’t thinking about how to best position themselves in the workplace and tie those assets into the wealth management business,” Gallant says.

The E-Trade brand is also likely to stick around, according to Morgan Stanley’s chief executive.

“You would be completely nuts to get rid of it,” Gorman said during the conference call. “This is a great brand and I am completely comfortable having it as part of the Morgan Stanley family.”

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M&A Wirehouses James Gorman E-Trade Financial Morgan Stanley Morgan Stanley Wealth Management Wirehouse advisors