Morgan Stanley wealth management shines

James Gorman once set a 20% margin target for Morgan Stanley's wealth management operation — then lowered it. Given the stellar 1Q performance of the unit, maybe he should go back to the original goal.
JUN 21, 2013
Morgan Stanley chief executive James Gorman may have to revisit his profitability target for the company's brokerage business. The banking giant on Thursday reported impressive growth in both revenue and profits in its wealth management division in the first quarter, with a 17% pretax profit margin, versus 12% in the same quarter last year. That already tops Mr. Gorman's goal of a 15% margin by the middle of next year. The Australian-born CEO famously set a 20% pretax-profit-margin target for the combined operations of Morgan Stanley and Smith Barney shortly after he engineered a merger of the two brokerages in 2009. The integration of the two firms has been bumpy — to put it mildly — and the combined businesses never came close to his goal over the past three years. He subsequently reduced his target to 15%, but despite Morgan Stanley's apparent momentum, he won't be fiddling with the margin targets again. “I foolishly came out with a 20% margin target three years ago and I admitted my mistake,” Mr. Gorman said in an earnings presentation today. “We then set our target for 15%for the middle of next year and I'm not going to reset it now. We're delivering on margins.” Mr. Gorman also took a small jab at the 23.4% margin reported by Merrill Lynch on Wednesday as part of Bank of America Corp.'s earnings release. “They have a different mix of businesses that comprise that margin figure,” he said. Revenue at Morgan Stanley's wealth management group rose 5% to $3.5 billion, from $3.3 billion in the same quarter last year. Net income for the entire unit was up 33% to $376 million. With Citigroup Inc. still holding a 35% interest in the joint venture, Morgan Stanley's share of the profits was $255 million — up 29% from the first quarter last year. The total number of advisers at Morgan Stanley was 16,284 at the end of the quarter, down 3% from a year ago. Annualized revenue per rep was up 9% to $851,000, from $780,000 in the 2012 first quarter. The most encouraging statistic from operations may be the more than $15 billion in new asset flows, said Alois Pirker, research director at consultant Aite Group LLC. The company now manages $1.79 trillion in assets. “This is a very positive quarter from a wealth management perspective for Morgan Stanley,” said Mr. Pirker. “I expect the performance will continue for the rest of the year unless the markets go haywire.”

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