Morgan Stanley rides wealth management train to solid first quarter

Chairman and CEO James Gorman expresses excitement about expanding into workplace plans with purchase of Solium

Apr 17, 2019 @ 1:58 pm

By Jeff Benjamin

The first-quarter stock market rebound was cited as a driving force behind the strength of Morgan Stanley's wealth management business, which generated $4.39 billion in revenues during the quarter and beat analyst estimates by $200 million.

During an earnings call with analysts Wednesday, chairman and chief executive James Gorman discussed the benefits of scale in wealth management.

"If you manage expenses tightly you can move the needle quickly," he said. "Wealth management is the ultimate scale business, and if you put it on the railway tracks the right way it rolls. Every now and then there's a little sand on the tacks which creates some friction, and every now and then you're going downhill and it goes faster. There's no magic to this."

Morgan Stanley's wealth management train, which rolled through a 13% stock market decline in the fourth quarter of 2018 followed by a 13% market gain during the first quarter, finished the period with $1.116 trillion in fee-based assets, up 7% from the prior quarter and up 5% from the same quarter a year ago.

Wealth management business revenues were up 6% from the prior quarter, and the $1.188 billion in profit before taxes represents an 18% increase over the prior quarter.

The bank's revenues and earnings were down from the same period a year ago, but the market reacted favorably to Morgan Stanley beating analysts' estimates in both categories.

The company reported a slight increase in total financial adviser headcount, to 15,708, and average annualized revenue per adviser of $1.2 million, up 6% from the previous quarter and flat from a year ago.

Responding to a question about Morgan Stanley's relatively stagnant adviser headcount, chief financial officer Jonathan Pruzan said less adviser movement might be the new normal for Morgan Stanley.

"There's been less movement of people both in and out, and that's been good for stability of the platform and the ability to build relationships and to continue to invest," he said. "Recruiting last year was quite slow for us, as we focused on digital and adoption and things of that nature. I think we have a very attractive platform so we're seeing interest in joining our platform, so there could be some marginal pick up in that area, but that's not really going to be a growth engine for us."

In terms of growth engines, Mr. Gorman referenced the pending acquisition of Solium Capital as an example of the kind of "strategic opportunities" the company will continue to pursue.

"Solium will enable us to bring together a major stock plan administration platform with the leading wealth management business and position us to be a top-tier provider in the workplace wealth space," he said. "Through Solium we gain a new scalable channel and direct salesforce, giving us the opportunity to target another client population, particularly a younger demographic in its wealth accumulation phase."

The Solium acquisition, announced in February and expected to close in May, will give Morgan Stanley exposure to more than 2.5 million individuals now on Solium's workforce services platform.

Most of those individuals are retirement plan participants, but Mr. Gorman sees them as a potential extension of the more than 3 million clients already working with Morgan Stanley advisers.

"What excites me is the expansion into the workplace," he said. "This deal is aligned with our strategic objective to round out our product offerings."

But Mr. Gorman also qualified his enthusiasm for Solium and the access to plan participants that could eventually become advisory clients.

"It's a very interesting strategic play that will play out over a number of years, but let's be realistic here," he said. "We have a $17 billion revenue business in wealth management that has nothing to do with Solium right now, and that's the main game. I don't want to dampen the enthusiasm, but to win in workplace and lose in the advisory business would not be a good answer. Our job is to win in advisory — crush that. And add these other verticals as the opportunities permit."

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