Morgan Stanley hits key growth target in 4Q as pretax profit margin reaches 20%

As Morgan Stanley chief executive James Gorman sets a new profit margin target for the firm's wealth management unit, executives will be looking to advisers to capitalize on new opportunities, such as lending to high-net-worth clients, an area where the firm lags.

After hitting key profit metrics sooner than expected, Morgan Stanley chief executive James P. Gorman has established a new profit margin target for the firm’s wealth management unit.
Growth in the fourth quarter helped boost Morgan Stanley Wealth Management to a 20% pretax margin, a number that he said in mid-2013 that he expected to see next year.
For the last three months of the year, after-tax profit was $476 million, up 11% from the previous quarter and 78% from a year earlier. At $3.2 billion, revenue was up as well, rising 7% from the third quarter of 2013 and 9% from the third quarter of 2012.
As a result, Mr. Gorman said that Friday that he thinks that Morgan Stanley Wealth Management could attain as high as a 25% pretax profit margin by next year.
“Based on where the S&P closed in 2013 and positive deployment of capital, we’re raising our targets to year-end 2015 to 22% to 25% even without the benefit of higher interest rates,” he said during a conference call announcing earnings.
That would put Morgan Stanley on par with many of its wirehouse competitors.
Bank of America Merrill Lynch reported a pretax margin of more than 26%
across its wealth units in the fourth quarter.
Wells Fargo Advisors’ margins were 23% across its wealth, brokerage and retirement units.
UBS Wealth Management Americas has yet to report year-end results.
In the fourth quarter, Morgan Stanley benefited from higher transactional revenue and inflows into fee-based accounts.
The firm brought in $1.1 billion in transactional revenue, up from $986 a year earlier.
Asset management fee revenue of $2 billion marked a 7% increase from a year earlier, the firm said.
Total assets under management hit a record $1.9 trillion.
Head count at Morgan Stanley Wealth Management, the largest wirehouse by total number of financial advisers, remained mostly unchanged, rising slightly to 16,456 at the end of last year, from 16,352 a year earlier. Average production per adviser, however, ticked up 7% from the third quarter to $905,000.
Most advisers managed somewhere around $116 million in assets at the end of the year, up from $110 million in the third quarter, the firm said.
Executives were optimistic that the firm could continue to capitalize on new opportunities, especially lending to high-net-worth clients with whom the firm has a “deep relationship,” the firm’s chief financial officer, Ruth Porat, said during the call.
Despite a nearly 50% yearly increase in loans to $29.5 billion last year from $20 billion in 2012, Morgan Stanley Wealth Management still lags behind many of its competitors in this area, she said.
“It has not historically been a focus for our system,” Ms. Porat said. “What we’re benefiting from here is that we’re underpenetrated relative to our peers.”
Over the past few years, the focus had been on teaming bank advisers with wealth managers to help provide clients with lending products.
The firm is specifically looking to expand securities-based lending, where the client’s portfolio is used as collateral, and mortgages for retail clients, Ms. Porat said.
She predicted that with help from wealth management, the overall firm would double its loan book by next year.
“This is a product the client wants,” Ms. Porat said. “It is a very productive add-on to the work [advisers] are already doing.”
Morgan Stanley will rely on cost-cutting measures to help boost margins, Mr. Gorman said.
The firm reduced noncompensation expenses by 8% between 2012 and last year. Yearly spending fell to $3.3 billion, from $3.6 billion.
The number of retail locations fell to 649 at the end of last year, from 694 a year earlier, as Mr. Gorman said that the firm had mostly finalized branch consolidation.
The cost cutting hadn’t cut into adviser payout, however.
The firm said that it was paying more because of the higher revenue being generated by its advisers.
In the fourth quarter, compensation was $2.1 billion, up 6% from $2 billion in the third quarter and $1.9 billion a year earlier.
Distributing that over the total number of advisers equates to about $130,469 per broker, up from $116,560 per adviser a year earlier. That number, however, includes compensation related to nonproducing personnel, including back-office workers and assistants, recruiting bonuses and other undisclosed expenses.