Morgan Stanley’s success looks long in the tooth to analyst

Sanford C. Bernstein & Co. analyst Christian Bolu, concerned over stalled adviser growth and what it means for lending and deposit growth, believes the stock will "under perform."

Morgan Stanley is an “aging bull” when it comes to its wealth management division, and the firm’s recent stalled growth in the headcount of financial advisers is turning into a problem, according to a new report by a Wall Street analyst.

The report was written by Christian Bolu, who joined Sanford C. Bernstein & Co. in September from Credit Suisse Securities (USA). Last week, he began coverage of a number of banks and brokerages, rating Morgan Stanley an “under perform” with a price target of $51 per share. In trading Monday afternoon, Morgan Stanley’s share price was $53.74.

Morgan Stanley recently has seen its headcount of brokers and advisers slide, losing 47 brokers in the fourth quarter, the same quarter it clamped down on advisers leaving by backing out of the protocol for broker recruiting. The company reported 15,712 financial advisers at the end of December, compared with 15,759 three months earlier.

Over the past few years, Morgan Stanley management “has focused on driving franchise profitability and adviser productivity, mostly through increasing lending penetration,” according to the report. “The lack of adviser growth could be an impediment to growing deposits over time.

“In addition,” he wrote, “the secular shift from wirehouse to independent channel that has fueled market share growth at firms like Charles Schwab could be another headwind for Morgan Stanley and wirehouse peers.”

The “bull thesis” for Morgan Stanley is on its “last legs,” Mr. Bolu noted. “Franchise transformation to highly recurring and predictable earnings stream is now complete. [Wealth management] growth [will be] more difficult given declining advisers/brokerage deposits.”

A spokeswoman for Morgan Stanley, Christy Jockle, did not immedtiately respond to a request for comment.

Wealth management is a significant line of business for Morgan Stanley, with 45% of the bank’s earnings coming from retail brokerage, Mr. Bolu noted.

Three years ago, Morgan Stanley’s CEO James Gorman laid out a handful of strategies to boost the firm’s return on equity to 10%. Along with reducing expenses, the “bank strategy” aimed to grow Morgan Stanley’s banking operations in part by adding clients from the wealth management group.

That was far from the only move Mr. Gorman has recently made at the firm’s wealth management group.

Breaking tradition with Wall Street, Morgan Stanley last May said it was moving away from recruiting experienced financial advisers, an expensive way to do business due to large bonuses given to brokers to move to a new employer. Instead, the firm said that it would focus in the future on digital platforms, teams of advisers and making its branch officers more efficient. Some competitors made similar moves.

Then, in October, Morgan Stanley made it even more difficult for brokers and advisers to leave when it dumped an industry agreement known as the protocol for broker recruiting.

While it may be looking a bit long in the tooth, according to Mr. Bolu, Morgan Stanley’s wealth management group, along with the other three wirehouses, Merrill Lynch, Wells Fargo Advisors and UBS Wealth Management Americas, are not about to disappear anytime soon. The four wirehouses last year controlled 61% of almost $100 billion in wealth management revenue among 10 of the industry’s largest firms.

But Mr. Bolu is less than sanguine in his outlook for Morgan Stanley, although many who watch brokerages and banks point to increasing interest rates as a simple way for those firms to increase profits.

Cash deposits have dipped in client accounts at Morgan Stanley, he wrote, with clients putting excess cash to work in equity markets. Clients are also increasingly moving deposits into cash alternatives such as money market funds and short duration bond funds to take advantage of increasing yields, he wrote.

“We believe the bull case of lending driven [return on equity] expansion and increasing capital return is at a negative inflection point,” he wrote. “We expect lending revenue growth to slow significantly over the next few years given deposit outflows and rapidly rising deposit cost. Contrary to consensus thinking, we believe rising rates will hurt rather than help.”

Morgan Stanley is expected to release its first quarter earnings on Wednesday.