James Gorman's profitability goal leans on Morgan Stanley's wealth management unit

James Gorman's profitability goal leans on Morgan Stanley's wealth management unit
Morgan Stanley can hit 10% return on equity driven in part by better margins in the wealth management group, CEO James Gorman said.
FEB 24, 2015
Morgan Stanley Wealth Management's role in its parent company's earnings continues to grow as chief executive James Gorman laid out a number of actions that will help Morgan Stanley & Co. achieve a 10% return on equity. Although Mr. Gorman did not provide a time frame for the actions, he said he expected the execution of the “bank strategy," which aims to grow Morgan Stanley's banking operations in part by adding clients from the wealth management group, and a reduction of expenses would help the overall company hit 10%, up from 8.9% currently. The plan also involves the company's exit from the oil business and actions in other divisions, but wealth management comprised almost half, or 49%, of total revenue at the company. “We see a clear path to an ROE of 10% based on the levers we just described,” Mr. Gorman said during the firm's fourth quarter earnings conference call wit analysts. “This includes hitting our wealth management margin targets.” Mr. Gorman reiterated that he expects the wealth management division to hit margins of as much as 25% by the end of this year. It posted a margin of 20% for 2014, he said. Bank of America, which includes Merrill Lynch and U.S. Trust, said it had margins of around 25% in the fourth quarter, although they had been as high as 27%. One of the expenses that Mr. Gorman has been focused on is compensation. The firm paid out around 60% of revenue as compensation in the fourth quarter, but Mr. Gorman said he expects that number to be 55% in the wealth management group. He also said that the firm would benefit from its focus on wealthier clients. Around $746 billion in assets came from clients with $10 million or more in assets, according to the presentation, up from $410 billion in the fourth quarter of 2009. Also, for the fourth quarter of this year, the firm reported it had 16,076 brokers and investment advisers, down 2% from 16,456 in the fourth quarter of 2013. Average annual revenue, however, was $944 million, up 5% year-over year but still below some of its rivals, including Bank of America Merrill Lynch, which had an average production of $1.07 million.

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