Morgan Stanley headed for $10 trillion of assets in just over five years

Morgan Stanley headed for $10T of assets in just over five years, as wealth unit adds nearly $90B

July 18, 2023 5:27 PM

Morgan Stanley headquarters in New York.

Morgan Stanley reported record quarterly revenue for its wealth management unit Tuesday, as the star division once again outshone others at the global bank in second-quarter earnings.

While the parent company's profits fell year over year, in a still-difficult market environment, the wealth management unit was the only one that delivered a growth in profits and revenue over the prior year. Notably, Morgan Stanley also added $89.5 billion of net new client assets in the wealth management unit alone, according to an earnings supplement Tuesday.

"Combined with inflows from investment management, we saw over $100 billion, bringing our year-to-date net new assets to approximately $200 billion in six months," CEO and chairman James Gorman said on an earnings call Tuesday with analysts. Firmwide, total client assets reached $6.3 trillion — with the lion's share of it coming from the wealth management unit.

The wirehouse appears ahead of schedule to reach its earlier goal of hitting $10 trillion in total client assets in coming years, so much so that Gorman said he foresaw that goal likely being reached just over five years from now — assuming an average of 5% in annual client account appreciation over that time. To reach $10 trillion on its original schedule, Morgan Stanley would have to add around $83 billion of net new assets per quarter, which equates to around $333 billion per year or $1 trillion of net new assets every three years.

"I mean, you're going to have a quarter in here somewhere that's a $50 billion quarter, and I wouldn't get too excited about that," Gorman said. "Just as I don't get too excited [that] we're ahead." Gorman was excited, though, about the "unstoppable" nature of the firm's growth in client assets.

"People are going to call me crazy, and I know it's the end of my tenure, so I get to do this," Gorman said. "But if you do 5% over 14 years, you end up at $20 trillion, which is a $100 billion revenue business." Gorman has been in the top job for around 14 years himself, he said.

The company beat expectations with earnings per diluted share of $1.24, which was 8% above the analyst consensus of $1.15. The stock was up 6% as of market close Tuesday.

"Overall, we would characterize results as respectable … against a challenged backdrop," researchers at JMP Securities wrote in an analyst note ahead of the earnings call.

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

Financials

The wealth management unit generated net income of $1.3 billion on revenue of $6.7 billion in the second quarter, accounting for 60% of firmwide profits.

Net income in wealth management shot up 10% over the prior year, and wealth revenue was also up 16% year over year.

By contrast, firmwide net income of $2.2 billion was down 13% year over year and down 27% from the past quarter. The wealth management unit's strong showing buoyed firmwide revenue of $13.5 billion to a 2% gain over the prior year, though.

Client assets

Total client assets at Morgan Stanley rose to $6.3 trillion, with $4.9 trillion coming from the wealth management business and another $1.4 trillion from the investment management unit.

In the wealth unit, $3.8 trillion of client assets were from the advisor-led channel, with $1.9 trillion of those assets being fee-based — in other words, steady income sources.

"In wealth management, we witnessed a moderation of sweep outflows as well as a stabilization of retail investments into cash and cash equivalents," chief financial officer Sharon Yeshaya said on the earnings call.

"Net new assets were driven by our advisory-led channel, existing client consolidation, and net recruiting was strong," Yeshaya said.

Expenses

Non-interest expenses in the wealth management unit popped 17% to $4.9 billion over the prior year, making it the costliest business line to finance. Firmwide expenses were $10.5 billion.

The highest line item for wealth expenses, compensation and benefits, totaled $3.5 billion — an increase of 21% year over year. While other units saw layoffs in recent months amounting to around 5% of global employees, excluding advisors and support staff, the wealth business was said to be largely spared — although it did realize $78 million of severance expenses in the second quarter, according to the earnings release.

Morgan Stanley doesn't break out its advisor headcounts, but it made headlines throughout the spring for its aggressive hiring of over 20 advisors from the ailing high-end regional firm First Republic, which succumbed to the panic of the banking crisis and eventually was purchased by JPMorgan Chase. Most advisors departing First Republic in the spring were said to be paid a market premium to leave, typically in the range of 400% or more of trailing 12-month revenue, said a recruiter who worked with many of them.

Workplace and self-directed channels

Self-directed assets in wealth management rose 34% year over year to $1.1 trillion, as the company completed "a significant part of the E*TRADE back-office integration, with the final part to be completed after Labor Day," Gorman said.

The number of self-directed households grew 4% over the past year to 8.1 million — unchanged from the past quarter.

Stock plan unvested assets rose 24% over the past year to $402 billion, and the firm's workplace channel reported 6.5 million stock plan participants — the same as last quarter, and up 7% over the past year.

Remark/guidance

Asked by Wells Fargo analyst Mike Mayo about his succession plans, which were announced in May at the annual shareholder meeting, Gorman played coy.

"We're already two months into it. When exactly that happens frankly just isn't that relevant," Gorman said, adding that he had promised the board to take care of some pressing matters — including preparations "over the next few months" for big regulatory changes to banks — so the new CEO would be able to have "a good start."

Gorman had said in May that he would step down at some point in the coming 12 months and that his successor would be one of three internal candidates. Andy Saperstein, co-president of Morgan Stanley and head of wealth management, is considered to be one of the top contenders to the throne.

The successor will be "not necessarily who's the best business operator running a given business on a given day, but who's best equipped to deal with the multiple constituencies and challenges of running a global bank," Gorman said, adding that he couldn't say more because it was up to the board to decide.