Morgan Stanley Wealth Revenue Jumps 6% Amid Pandemic
(Story updated in 9th paragraph with executive’s comments on recruiting statistics.)
Morgan Stanley, reporting its first full quarter of coronavirus economy results, said its credit quality relative to big-bank peers and past investment in technology helped its advisors attract client assets in the second quarter “despite a challenging market and rate environment.”
Net revenue in the wealth management division, which Morgan Stanley promotes as a stabilizing offset to less predictable trading and banking business, grew 6% from last year’s March-through-June quarter, and 16% from this year’s first quarter to $4.68 billion. But the second-quarter results that Morgan Stanley reported Thursday blew past analysts’ expectations largely on the back of strong trading.
The flows contrast with Merrill Lynch, which said Thursday that new assets in advisory accounts in the second quarter fell 32% from a year earlier to $3.6 billion.
Morgan Stanley Chief Executive James Gorman pitched the wealth management results as a vote of confidence in the company’s strength amid the global pandemic.
“Institutions that are strong and stable attract flows disproportionally,” he said on a call with analysts, recalling Morgan Stanley’s weaker capital position after the 2008 Great Recession. “We were losing…in the last crisis. In this crisis the reverse is happening. We are attracting flows and FA talent.”
Morgan Stanley ended the quarter with 15,399 advisors, down by 234 from a year ago. It actively re-entered the recruiting market this year, and company officials said the 1% decline in net advisor count primarily reflects fewer candidates in training classes and more veterans retiring.
“Net recruiting has materially improved,” Gorman said on the call, without providing details.
New advisors hired this year were managing 90% more assets at their former firms as advisers who joined in the same period last year, while those who left had books 40% smaller than those who left last year, another senior executive told AdvisorHub. “And we retain almost 50% of assets when advisors do leave,” said the executive, who spoke on condition of anonymity.
Wealth management clients remain cautious with their investments, with cash and short term securities representing more than 20% of the $2.66 trillion they keep at the firm.
Fee revenue of $2.5 million was essentially flat with the second quarter of 2019, despite the greater flows, because of lower market valuation and client changes in asset mix, the company said. In a sign that some investors are getting more interested in stock-picking amid the coronavirus volatility, however, transactional revenue in traditional brokerage accounts soared 48% to $1.08 million from the year-earlier quarter, and 169% from this year’s first quarter.
The average Morgan Stanley advisor is on pace to generate revenue of $1.214 million this year, the company said, up 16% from $1.045 million as of March 30 and 8% from $1.125 million as of June 30, 2019.
Net income in the firm’s wealth unit fell 1.3% to $864 million from the year-earlier second quarter, substantially less than at rivals Merrill and UBS Wealth Management Americas.
Gorman said investors and clients are rewarding Morgan Stanley’s low exposure to small-business and consumer lending, with very few unsecured loans on its books.
Wealth customers’ liabilities—securities-backed loans, mortgages and deposits—were up 12% from a year earlier to $94 billion, the company said. Bank lending increased 15% and brokerage sweep deposits were up $40 billion from a year ago.
The loan volume took some of the edge off low rates, as net interest income grew 1% from the 2019 second quarter, and 15% from this year’s first quarter, to $1.03 billion.
The wealth division’s pretax profit margin fell to 24.4% as of June 30 from 28% one year earlier.
Gorman, who took the reins of the company when wealth margins were in single digits, said the metric is strong in light of rock-bottom interest rates, and highlights the underlying drivers of wealth management—capturing more client assets from other firms and retaining investors and advisors.
But trading was the headline number for Morgan Stanley in the second quarter, as it was for rivals including J.P. Morgan Chase and Goldman Sachs. Trading revenues jumped 73% from the second quarter of 2019, leading to record-high earnings and revenue for the company that trounced Wall Street analysts’ estimates.
Morgan Stanley shares were up 1.83% to $52.29 in afternoon trading, while the S&P 500 and Dow Jones Industrial Average were down 0.40% and 0.47%.