On Advice

What to make of Morgan Stanley's new robo

The brokerage's focus on digital could be a way to retain younger clients or an effort to catch up with Merrill

Mar 22, 2018 @ 11:00 am

By Bruce Kelly

Morgan Stanley is testing how an old-school gang of brokers and advisers and a newfangled, algorithm-driven robo-adviser can work together.

When Morgan Stanley said last May that it was cutting back on recruiting and would focus on building staff, it added that its intention was to focus in the future on digital platforms (think robo-adviser), teams of advisers and making its branches more efficient.

"Many of the resulting initiatives are beginning to roll out and there is much more to come, including hiring hundreds of Wealth Advisor Associates and Digital Advisor Associates in the branches to help Advisors put these new capabilities to work for their clients," Shelley O'Connor and Andy Saperstein, co-heads of wealth management, wrote at the time in a memo to regional directors and branch managers.

Some of Morgan Stanley's 15,712 brokers and advisers may be skeptical of the firm's ability to follow through on its plan. Those advisers have seen a lot of changes recently.

Greg Fleming, once regarded as potentially the firm's future CEO, left as president of wealth management two years ago. And as noted, Morgan Stanley said last year that it was reducing its reliance on recruiting experienced advisers, an expensive way to do business. Competitors Merrill Lynch and UBS Wealth Management Americas have also cut back on recruiting.

Capping the flurry of changes in policy and personnel, in October Morgan Stanley dumped the broker protocol for recruiting, making it tougher for experienced advisers to leave for a new employer.

After the two-year overhaul, it's becoming clear that Morgan Stanley and its CEO, James Gorman, are not only taking steps to keep advisers in their seats but want to increase and broaden the products and services the firm offers clients. One of those areas is online investing and the Internet.

In 2016, Morgan Stanley hired Charles Schwab & Co. Inc. veteran Naureen Hassan as chief digital officer for wealth management. At Schwab, she was in charge of the firm's robo, Schwab Intelligent Portfolios, and oversaw client experience and web and mobile channels.

At the end of last year, Morgan launched Morgan Stanley Access Investing, "an online investing platform designed to help build, monitor and automatically rebalance a diversified portfolio," according to a company press release. Such platforms are commonly referred to as robo-advisers in the financial advice industry.

And earlier this week, Morgan Stanley said it was expanding wealth management operations in the Phoenix area and opening a new office there in July. The office will include a small number of staffers working on Morgan Stanley's digital products, sources said.

The robo-advice field is already crowded, so why would Morgan Stanley want to enter it now?

One reason could be that Mr. Gorman and other senior executives at the firm are probably sick and tired of seeing clients who are looking for a cheaper robo-advice platform walk out the door with their assets. Having a robo-advice offering gives Morgan Stanley a better shot at hanging onto younger clients who may be lured by robo-advisers such as Betterment and Wealthfront.

One Morgan Stanley competitor, Merrill Lynch, already has a huge head start in online investing, having launched Merrill Edge in 2010. Since then, Merrill has seen tremendous growth; it currently has $184.5 billion in client assets and 2.4 million accounts.

Another of Mr. Gorman's rivals, Jamie Dimon, chairman and CEO of JPMorgan Chase & Co., last year called robo-advice "table stakes," meaning it's a minimum requirement to play, according to Steven Chubak, a brokerage analyst with Nomura Instinet. "He meant it was a natural product extension a firm like Chase should have," Mr. Chubak said.

By the way, JPMorgan Chase plans to offer its self-directed investing platform to all its clients this summer, according to Mr. Chubak.

What's less clear is what Morgan Stanley's robo could add to its bottom line. Merrill Lynch's parent company, Bank of America Corp., does not report separate earnings for Merrill Edge. And Mr. Chubak says profits from online brokers are minimal at large firms such as Morgan Stanley.

Meanwhile, pretax profits at the wealth management units of Morgan Stanley and Merrill Lynch can range from 25% to 28%, with internet brokers like Schwab and ETrade posting pretax earnings of 45% or higher.

"I really haven't done any work specifically on Morgan Stanley's new product because it is such early days," Mr. Chubak said. "The online brokerage launch has gotten very little air play. It's attractive, and in the long term it makes sense but they're not the only ones in the hunt."

It's too early to tell the potential impact, if any, of Morgan Stanley Access Investing on the firm's profits. But it's clear that Morgan Stanley's advisers are dealing with numerous changes. Working next to a robo-adviser could be the least of their worries.


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