Morgan Stanley reaches $6T in client assets as wealth unit adds $110B

April 19, 2023 4:36 PM

Morgan Stanley's wealth business sparkled in earnings Wednesday as the only major division of the Wall Street giant to report a revenue and profit bump over the past year.

The wealth management unit pulled in just under $110 billion of net new assets in the first quarter of this year, a haul that helped bring the firm to $6 trillion of total client assets — and that puts it ahead of schedule to reach its goal of adding $1 trillion in net new client assets every three years, eventually reaching $10 trillion in total assets. That equates to a goal of adding $333 billion in net new assets each year, or around $83 billion per quarter.

Morgan Stanley overall reported $3.0 billion in profit — a 19% fall from a year ago, as the firm navigated continuing torpor in the investment banking side and markets remained down from year-ago levels. However, profits jumped 33% over the prior quarter. Revenue fell 2% to $14.5 billion, from year-ago levels of $14.8 billion, but rose 14% from the previous quarter.

The company beat Wall Street analyst expectations with earnings per share of $1.70, 6% more than the analyst consensus of $1.62.

"While the performance of the overall business was strong, the results reflected the impact of the environment," Morgan Stanley's CEO and chairman James Gorman said in an earnings call Wednesday.

Although the firm does not disclose its advisor headcount, analysts commented on the call about Morgan Stanley's apparent success in recruiting from firms like First Republic that were hammered in the banking crisis of last month.

Over a dozen First Republic advisors joined Morgan Stanley "unsolicited" in recent weeks, bringing with them around $8.7 billion in assets, AdvisorHub reported.

"Obviously, we're attracting financial advisors from — we're seen as somewhat of a safe harbor, I guess, across the industry," Gorman said, without naming First Republic.

Gorman emphasized that the wealth business is growing in many ways, not just recruiting. He pointed to strong growth in the workplace channel in bringing in held-away assets. "The workplace conversion is a massive opportunity now that we're focused on," he said.

"If you ask an advisor right now, which is the most stable and most reliable of the brokerage firms, they're all going to tell you it's Morgan Stanley," industry recruiter Phil Waxelbaum said in an interview.

The firm faces ongoing lawsuits over alleged discrimination, among other complaints. But the industry perception of its brand remains strong, several recruiters told Financial Planning in recent weeks.

Morgan Stanley agreed to sell a business that administers its alternative investment feeder funds to iCapital, a financial-technology firm run by a former Goldman Sachs banker.

Morgan Stanley books record quarter and year for wealth management

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

Financials

Profits in wealth management rose by 8% to $1.38 billion from $1.27 billion year over year, but fell 3% from the prior quarter according to an earnings supplement.

As in other recent quarters, wealth management revenues lifted the bottom line for the rest of the firm as they rose 11% over the past year to $6.56 billion. Still, they were down 1% from the prior quarter.

"Results reflect higher net interest income versus prior year primarily driven by higher interest rates, even as clients continue to redeploy sweep deposits," the bank said in a press release.

The firm reported $2.16 billion of net interest income, a key driver of profits, in the wealth business — 1% up from a quarter ago, and a spike of 40% year over year.

Client assets

Firmwide, total client assets reached $6 trillion, a company spokesperson said in an email. Asked if this was an all-time high for the company, the spokesperson said they were unable to confirm immediately.

In wealth management, client assets under management rose to $4.6 trillion. This was up 9% from the prior quarter, but down 6% year over year.

Advisor-led client assets of $3.58 trillion also rose over the prior quarter, by 6%, but were down from the past year by 7%.

"Clients increased their allocation to cash equivalents, such as money market funds and U.S. Treasuries by over 60% versus last year. At the same time, deposits declined in the quarter by 3% to $341 billion," the company's chief financial officer Sharon Yeshaya said, blaming the "events in March and the rising interest rate environment."

She added that while deposits fled, "investable assets stayed within Morgan Stanley as our clients worked with advisors to help navigate the volatile markets."

Growth in wealth channels

The firm boasted a big haul of $109.6 billion in net new assets for the wealth management unit.

Fee-based asset flows in the advisor-led channel were $22.4 billion, while the number of households in the self-directed channel grew to 8.1 million, up 7% over the past year and 1% over the past quarter.

In the workplace channel, the number of stock plan participants grew to 6.5 million over 6.3 million last quarter, a 3% growth over the quarter — and a 12% bump over the past year.

"Our strategy is working and we are seeing channel migration from workplace to advisor-led. Advisor-led flows originating from workplace relationships reached $28 billion in this quarter alone, double versus this time last year, and this compares to the approximate $50 billion we saw annually over the past three years," Yeshaya said.

Expenses

Firmwide, noninterest expenses of $10.5 billion rose 7% over the past quarter and 4% over the past year.

In wealth management, expenses of $4.8 billion were up 10% year over year, as compensation and benefits took up $3.5 billion — 11% higher year over year and 4% over the past quarter.

"Compensation expense increased from a year ago driven by higher expenses related to certain deferred compensation plans linked to investment performance," the firm said.

"Non-compensation expenses increased from a year ago primarily driven by investments in technology, as well as higher marketing and business development costs."

Remark

Responding to an analyst question, Gorman said he wasn't interested in acquisitions he considers off-brand, such as private banks in Europe.

"I think we've got to keep our eye on the prize here and not get distracted by going down some rabbit hole because somebody else is in stress. Maybe somebody else is in stress because it's not a very attractive rabbit hole when you get down inside it," Gorman said.

Gorman also noted the firm's big recent growth in certain markets such as Asia — where revenue grew 40% over the past quarter.

Regionally, Gorman said the firm considers "Asia more interesting. Europe, not interesting. LatAm, a little bit interesting. And U.S., definitely interesting."