The market pullback in the second quarter took its toll on the global wealth management sector of Morgan Stanley Smith Barney LLC, which today reported a 26% decline in pretax income from the first three months of the year to $207 million. In the credit-scarred second quarter of 2009, Morgan Stanley reported a loss in the retail-brokerage unit of $71 million.
The wealth management unit ended the quarter June 30 with $1.5 trillion in client assets, down 6% from three months earlier but up 6% from the second quarter of 2009.
Morgan Stanley, whose retail unit about doubled in size when it entered into a majority-owned joint venture with the retail-brokerage business of
Citigroup Inc.'s Smith Barney unit 13 months ago, ended the quarter with 18,087 brokers worldwide, virtually flat compared with 18,140 three months earlier and 18,444 one year earlier.
Bank of America Corp.'s Merrill Lynch unit, the second-largest broker, has about 15,100 registered representatives by comparison.
Investors' concerns about the economy and the 12% drop in the stock market took its toll on Morgan Stanley's ability to gather assets during the quarter. Outflows from client accounts outpaced inflows by $5.5 billion in the three-month period, compared with a gain of $9.3 billion in this year's first quarter and $400 million one year earlier. Client assets per broker fell 6% to $83 million from three months earlier but were up 8% from $77 million one year ago.
Morgan Stanley Chief Executive James Gorman said in a conference call with analysts that he's less worried about the outflow of assets--which he said translates into only about $5 million of revenue a quarter--than he is about broader events over which the company has no control such as the performance of the stock market and low interest rates. He said he's pleased with performance in areas that are controllable, such as the integration of Smith Barney and the stability of the brokerage salesforce.
Although Morgan Stanley has extended the time in which it expects to see a rebound in retail activity, it is not cutting back on expenses to integrate the Smith Barney business. It will spend between $450 million and $500 million on the integration this year and still expects the total integration costs to be about $1.1 billion, said Chief Financial Officer Ruth Porat.
“It's a difficult environment for retail investors,” said James Wiggins, a spokesman for Morgan Stanley. “Given the subdued environment for retail investors, this was a reasonable quarter.”
The percentage of client assets in fee-based accounts, a much-coveted metric at the firm, was 26% on June 30, flat with three months earlier and up from 23% before the Smith Barney joint venture began.
In another closely watched indicator, Morgan Stanley said 71% of its retail assets June 30 were from clients with $1 million or more of assets, down from 72% three months earlier. Assets of clients with $10 million or more fell 9% from the first quarter to $440 billion, and those with $1 million to $10 million in assets were down 6%.
Morgan Stanley, which recently introduced a broker recruiting plan for low-tier, “fourth-quintile” brokers, said asset declines among less wealthy clients were not as severe.
Merrill Lynch last week said that it also suffered a decline in its profile among affluent investors.
Morgan Stanley overall reported better-than-expected second-quarter earnings, with net income from continuing operations of $1.4 billion, or 80 cents a share. That reversed a loss of $138 million, or $1.36 per share, one year earlier. The average estimate of 11 analysts for Morgan Stanley was 48 cents. Shares of Morgan Stanley Ticker:(MS) were up roughly 8% in morning trading on the performance.
Pretax income in institutional securities — which includes sales, trading and investment-banking activities — was $1.6 billion in the second quarter, attesting to much higher profit margins in those businesses than in retail.
Pretax margin in global wealth management in the second quarter was 7%, compared with 35% in institutional securities.
“We expect margins will remain subdued for the rest of the year,” Mr. Gorman said, adding that long-term Morgan Stanley expects profit margins of 20% in the wealth management and other businesses.
He also said that the integration of Smith Barney continues to be running on schedule against a background of a “weak” retail and institutional investor market that will continue in the intermediate term.
Morgan Stanley's asset management unit, which has been undergoing years of restructuring, reported a loss of $86 million in this year's second quarter on net revenue of $410 million.
In the second quarter of 2009, Morgan Stanley reported a loss of $298 million pretax in its institutional securities sector and a loss of $210 million in asset management.
Net revenue at the company fell 12% from the first quarter to $7.95 billion but was up 53% from one year earlier. Revenue in wealth management was $3.1 billion, compared with $4.5 billion in institutional securities (including $3.7 billion from sales and trading) and $410 million in asset management. Sales and trading revenue historically had far surpassed retail-brokerage revenue at Morgan Stanley.
