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Morgan Stanley's star wealth management unit can't offset 3Q revenue slump

By Dan Shaw
October 18, 2023 1:58 PM

Morgan Stanley reported a nearly 15% annual rise in the assets clients were entrusting to its financial advisors as the Wall Street stalwart continues to build its wealth management fortress.

The firm, which released its third-quarter earnings on Wednesday, said its client assets managed by financial advisors rose to $3.75 trillion from $3.3 trillion year over year. That helped produce $6.4 billion in net revenue for the unit in the third quarter.

Morgan Stanley's wealth management division continues to be the star among its various business lines. The unit's revenue counted for nearly half of the firm's total haul in the third quarter.

Under CEO James Gorman, Morgan Stanley has set itself the ambitious goal of eventually having $10 trillion under management by bringing in an additional $1 trillion every three years. Hitting that point requires the bank to draw in about $83 billion in net new assets every quarter.

Morgan Stanley's wealth management business fell behind that pace in the third quarter, reporting only $35.7 billion in net new assets. 

"That's obviously below recent quarters," Gorman said on an earnings call Wednesday. "It's consistent with what I've been saying for a long time. These numbers will bounce around, and in any quarterly period, there's always things."

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Morgan Stanley's overall performance was dragged down primarily by its investment banking unit, which helps finance mergers and acquisitions, initial public offerings and similar deals. The bank's overall profits for the quarter were down 9% year over year to $2.8 billion.

Morgan Stanley has been seen as an industry leader in recent times for its decision to move away from the cyclical ups and downs of investment banking and rely more on the steady fees generated by wealth management. It's a pivot that one of its biggest Wall Street rivals, Goldman Sachs, has been trying to emulate, with mixed results. 

To see the main takeaways from Morgan Stanley's third-quarter earnings, scroll down. To read about the firm's second quarter, click here. For the first quarter, follow this link.

Financials

Morgan Stanley's wealth management unit generated net income of $1.3 billion on $6.4 billion in net revenue in the third quarter. Both figures were up 5% year on year.

Client assets

Supplementing its $3.75 trillion in assets under management by advisors, Morgan Stanley reported just over $1 trillion in clients' self-directed accounts and nearly $1.39 trillion in its investment management division. That brought its total asset count to nearly $6.2 trillion.

Although Gorman acknowledged that Morgan Stanley's $35.7 billion in net new assets for the quarter was somewhat disappointing, he noted that many of the firm's previous quarters have far exceeded expectations. That means Morgan Stanley is still well on its way toward hitting its $10 trillion goal.

"This year, we had two quarters where we had some surprise on the upside, and in aggregate for the year, we're totaling net new assets of $235 billion year-to-date," Gorman said. "Our annualized growth rate is the high end of the 5% to 7% range that we've been looking at, and it's consistent."

Expenses

The wealth management unit's noninterest expense rose 4% year on year to $4.65 billion. The most costly line item, compensation and benefits, rose 6% to $3.35 billion.

Morgan Stanley does not report how many financial advisors and other wealth managers it has on staff.

Self-directed asset management

Morgan Stanley's roughly $1 billion in client assets in its self-directed channel was up by 26% year over year in the third quarter. Much of that boost came from the firm's completed integration this quarter of the E-Trade online brokerage, which it bought in October 2020.

Gorman said in the earnings call that the integration required bringing over 14 million accounts. 

Chief Financial Officer Sharon Yeshaya said $900 billion in assets under management have been moved over to Morgan Stanley.

"This will continue to enhance our ability to introduce clients and advisors and seamlessly transition them into advice-based relationships," Yeshaya said.

Unvested stock assets held in Morgan Stanley's workplace channel meanwhile rose by 21% to $337 million. The number of stock plan participants making use of that service was up by 6% to 6.6 million.

Remarks

On the earnings call, Steven Chubak with Wolfe Research asked how Morgan Stanley's need to offer strong compensation to retain advisors and other employees has affected its bottom line. 

Morgan Stanley has played a prominent role in the "war for talent" of recent years, both recruiting wealth managers from rival firms and watching them leave for competitors.

Yeshaya noted that Morgan Stanley referred to both layoffs and a greater reliance on technology as ways the firm has tried to hold down compensation costs. Gorman said employee departures in fact have been low, usually consisting of "onesies or twosies" teams leaving for elsewhere.

"You can lose somebody, a senior person here and there …" Gorman said. "But across the 80,000 people we've got, the broader message is attrition has been remarkably low, and that's something that we've just got to work through.

Gorman also offered assurance that he was sincere when he announced his intention in May to retire within a year.

"I want to get out of the seat and give somebody else a chance to see what they can do with it, and I think there's a lot of things, the growth opportunities in this company," he said. "Now that we've set it up with so many planks that are solid, you have an abundance of choices."
Dan Shaw
Reporter, Financial Planning
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