Markets misread AI's impact on brokerages, Morgan Stanley says

Schwab, LPL and other brokerages are positioned to benefit from artificial intelligence-driven productivity gains even as the industry navigates short-term volatility, according to a Morgan Stanley analysis that frames AI more as an operational aid than an existential threat.

The report published last week says concerns that AI will disintermediate advisors have driven some market selling but argues those fears are largely overdone.

“We see AI risk at the brokers as negligible, with our covered brokers and wealth managers as well placed to benefit from AI that could unlock productivity gains, allowing advisors to serve a broader set of customers,” analysts from wrote.

The traditional brokerage sector underwent a significant selloff last month, with at least some bearish views triggered by a new tax planning-focused AI rollout from Altruist.

"Over the last 90 days, our brokers coverage has traded down -17.1% on average vs the rest of our coverage down -12.3% on average," Morgan Stanley's analysts said. "YTD, the brokers are down -16.1% vs rest of our coverage down -11.4% on average."

Since the February selloff, wealth firms have moved to double down on their AI capabilities, including a partnership between LPL and Anthropic to introduce AI for advisors.

"We remain constructive on the Brokers despite negative headlines around AI impacting business models," the report said.

The authors asserted that firms with scale, distribution and existing wealth platforms can use AI to expand advice without replacing the advisor role. They highlighted two mechanics for AI could lift broker economics: higher advisor capacity and lower servicing costs. Automating of routine tasks, faster portfolio analysis, and improved client reporting could let advisory teams handle larger books without proportionate head count growth.

For firms that already earn a meaningful share of revenue from net interest income, growing client cash balances in risk-off periods also provides an offset to weaker trading volumes. On that note, Morgan Stanley's analysts pointed to Schwab's "relatively high skew to net interest revenue (47%) with a securities portfolio that's poised to reprice (from sub 2% yields).” In theory, the firm's large sweep balances and fixed-income holdings could reprice into higher yields, bolstering earnings even as trading activity fluctuates.

While short-term market volatility could boost retail trading, the report warned that prolonged market drawdowns could sap engagement and depress transactional revenue, a pattern that hurt retail platforms during prior risk-off episodes. Rate uncertainty is another pivot point: deeper or earlier Fed cuts – which could be on the table as new troubles around inflation and economic growth pile up – would pressure net interest margins, undermining a key revenue cushion for some brokers.

Morgan Stanley is selectively constructive on the brokerage sector, with Schwab being the top pick as a tactical overweight for the current backdrop.

"We see [LPL Financial] as more of a 2nd-half story as it moves past its integration of Commonwealth Financial Network and focuses on outward advisor recruiting to support net new asset recovery," the report read.

The analysts held more nuanced appraisals for Robinhood and Raymond James, given their respective revenue mixes and exposure to trading and headwinds in investment-banking activity.