Morgan Stanley checked off one big item from its wealth management to-do list — at least in its latest quarter — while making progress toward its ambition of managing $10 trillion in wealth and investment assets.
The wirehouse reported Wednesday that its pretax margin for its wealth management business hit 30.3% in the third quarter. That percentage, up from 28% in the previous quarter, just barely topped the firm’s long-standing goal of pushing that key performance measure above 30%.
Pretax margin is the proportion of revenue the firm has left over following the subtraction of nontax expenses. On a call with analysts, Ebrahim Poonawala of Bank of America Securities asked Morgan Stanley executives if they thought the pretax margin could be held above 30% in the medium term.
CEO Ted Pick said he’s most interested in reinvesting in the wealth management business for growth. He noted the firm has put money into support for financial advisors, its E-Trade self-directed investing platform and its Morgan Stanley at Work offering, which helps employers manage equity compensation plans and other benefits.
“We’re going to continue to put investment dollars into the system,” Pick said. “Now whether that with continued operating leverage gets us to a number that is higher than 30% over time, let’s see how it goes.”
Moving ever closer to $10 trillion
Morgan Stanley again reported progress on another goal adopted under previous CEO James Gorman, who put the firm on a path targeting $10 trillion in client assets in its wealth and investment management divisions. Morgan Stanley reported ending the quarter with $8.9 trillion in client assets, up from $8.2 trillion in the previous quarter.
“We are committed to advancing through $10 trillion in total client assets and on to the next phase of Morgan Stanley’s growth trajectory,” Pick told analysts on the call.
Of the third-quarter asset total, just over $7 trillion was held in the firm’s wealth management unit, as distinct from investment management. The wealth unit benefited from $81 billion in net asset inflows in the quarter.
Nearly $42 billion of those new assets went into fee-generating advisory accounts, which are particularly prized for their ability to generate steady streams of revenue. All told, those types of accounts held nearly half of the firm’s assets overseen by advisors, or roughly $2.65 trillion (up 15% year over year).
Just over $1.6 trillion of the wealth management unit’s assets were in E-Trade and other self-directed investing accounts, which were used by 8.4 million households. And $534 billion of the asset tally was in the form of unvested stock managed by the Morgan Stanley at Work unit, which served 6.6 million stock plan participants.
The wealth management funnel and record revenues
Morgan Stanley often describes its wealth management business as a funnel that brings in new clients either through its self-directed or workplace services and then eventually moves them on to full relationships with financial advisors. Chief Financial Officer Sharon Yeshaya told analysts Wednesday the system is working as intended.
“Another quarter of strong net new assets and robust fee-based flows illustrate the power of the funnel and the scale of our client base, which spans over 20 million relationships,” Yeshaya said. “Assets that originated from Workplace continue to migrate into our advisor-led channel as a result of the consistent investments we have made into our differentiated platform.”
The asset inflows helped provide Morgan Stanley’s wealth management unit with a 13% year over year increase in the firm’s net revenue, which hit a record of $8.2 billion in the third quarter. That resulted largely from “robust levels of client activity and higher net interest income,” Morgan Stanley reported.
Of the revenue total, nearly $4.8 billion came from managing assets (up 12% year over year), $1.3 billion from transaction charges such as commissions (up 22%) and nearly $2 billion from interest income (up 12%).
Offsetting that revenue was a 10% year-over-year increase in noninterest expenses, which hit $5.7 billion in the third quarter. The bulk of that came from $4.4 billion spent on compensation and benefits, a figure up 13% year over year. With expenses subtracted from revenue, Morgan Stanley was left with nearly $2.5 billion in profits before taxes, up a whopping 21% year over year.
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