Morgan Stanley Wealth Rebounds, Thanks to Securities-backed Loans
Morgan Stanley brokers endured client lethargy in the second quarter as fees and commissions at the world’s biggest brokerage firm fell from a year ago. When it came to selling mortgages and portfolio-backed loans to wealthy clients, however, brokers fired on all cylinders, the company said Wednesday.
Loans to wealth clients soared 19%, to $69 billion as of June 30 from $58 billion one year earlier, generating an 18% jump in net interest income at the wealth division to $920 million. Traditional noninterest revenue slipped 5%, as commissions and fees swooned 14% to $423 million while asset management and related managed-money fees dipped 4% to $2.08 billion. (Both revenue sources rebounded, however from Morgan Stanley’s woeful first quarter.)
Unfortunately for advisors, Morgan Stanley does not calculate loan revenue into the payout grids that determine the bulk of broker compensation, and such expense discipline will endure as the company waits for interest rates to rise and customers to regain confidence in the global economy, executives said.
“We continue to work on lowering compensable revenue,” Chief Financial Officer Jonathan Pruzan told analysts on a conference call after Morgan Stanley reported a 12% decline in overall net income versus the second quarter of 2015. The company does not anticipate that investors will increase their “engagement” with the markets this year, Pruzan added, fingering Brexit and other geopolitical concerns for keeping clients on the sidelines.
Bank Product Promotions
Morgan Stanley, like Merrill Lynch and other bank-owned brokerage companies, has been encouraging advisors to sell bank-related products and services ranging from credit cards to loans to cement wealthy client relationships despite market volatility and to generate net interest revenue to offset investment income declines.
Securities-backed loans at Morgan Stanley jumped 24% from June 30, 2015 and 5% from March 31 of this year to $31.4 billion while residential mortgage loans were up 23% and 4% respectively to $54.1 billion as of June 30.
An analyst on Wednesday’s call suggested that brokers are maxing out on the number of loans collateralized by investment portfolios that they can push to wealthy clients, citing Morgan Stanley statistics that some 16% of clients already have securities-backed loans.
Gorman forcefully demurred.
“I don’t agree that it’s a high number,” he said, distinguishing the loans from margin lending that can be used only to buy securities and that decline when markets collapse. “Clients want to use money from a lot of different sources.”
While some brokers complain of losing control of client relations to loan departments and of nuisance calls from clients about credit card charges, they have little choice but to follow their employers’ dictates. An arbitration panel earlier this month repudiated a former Morgan Stanley broker’s claim that poor loan servicing forced him to follow an important client to a rival broker-dealer.
Regulators are reportedly investigating whether Morgan Stanley offered illegal expense account incentives to push the securities-backed loans in New England in 2014.
Morgan Stanley has been aggressively promoting deposit accounts to help fund its loans cheaply as it plays catch-up with competitors such as Bank of America and Wells Fargo Corp that have large branch banking networks. The company is now flogging a “Premier” cash management account that offers unlimited ATM rebates and free credit monitoring to clients who open deposit accounts with at least $50,000 or arrange for monthly direct deposits of $5,000, several brokers said.
Wealth management is more central to Morgan Stanley than to its large banking competitors. The division contributed 43% of Morgan Stanley’s $8.9 billion of revenue in the second quarter and almost one-third of its net income of $1.58 billion, compared with less than 15% at Bank of America, the parent of Merrill Lynch.
Pretax profit margin at Morgan Stanley rebounded to 23% from 21% in this year’s first quarter, in line with Gorman’s commitment to squeeze a profit return of 23% to 25% from wealth management for full-year 2017.
Morgan Stanley is well-positioned for the Department of Labor’s fiduciary rule that goes into effect in April and does not expect it to retard expectations for wealth management revenue growth going forward, executives said on Wednesday. The rule’s tight clamp on brokers’ conflicts of interest with clients will have no effect on bonuses or other recruiting tools, Gorman told analysts.
Morgan Stanley ended the second quarter with 15,909 brokers—up 21 since March 31 and 138 since the end of last year’s second quarter. Annualized revenue per broker dipped 2% to $959,000 but was up 4% from this year’s first quarter. Merrill Lynch said last week that average production among its 14,416 brokers fell 6.3% annualized during the second quarter to $984,000.