Morgan Stanley’s wealth management business, which recently took 100 percent ownership of Smith Barney, posted sharply higher second-quarter earnings as client assets and trading activity both climbed during the past year.
More than any other Wall Street firm since the financial crisis, Morgan Stanley has staked its future on individual investors. For most of the past five years, though, a combination of market turmoil, economic weakness and set backs in the integration of Smith Barney dragged on the results of the firm’s wealth management division.
But Morgan Stanley may have turned the corner. It’s pretax margins reached 18.5 percent during the quarter, the highest rate of profitability since the brokerage joint venture was formed with Citigroup Inc. in 2009. Last month, Morgan Stanley acquired the last remaining 35 percent stake in the venture from Citi.
“We look forward to the full benefits of the recently completed wealth management acquisition,” Morgan Stanley Chief Executive James Gorman said in a statement.
That margin, which is closely watched by investors and analysts, has been around 17 percent and has improved considerably from single-digit levels a few years ago when merger integration costs were highest and revenue growth was subdued. Morgan Stanley when the merger was first announced had set a target of 20 percent pretax margin, but later said 15 percent was a reasonable goal until markets fully recovered.
In the most recent period, non-compensation costs fell 5 percent to $834 million in the absence of platform integration costs.
For most of the past year, a rising tide of stocks and bonds helped lift wealth management results, by boosting assets under management and increasing the asset-based fees and commissions generated from growing client balances.Wealth management net revenue rose 10 percent to $3.53 billion from the year-ago period, while pretax income for the division surged 60 percent to $655 million.
The ranks of financial advisors slipped by 157, or 1 percent, to 16,321 from last year, but they rose by 37 advisors from the end of March. Average production rose 12 percent to $866,000 from the year-ago period.
Total client assets were $1.78 trillion at quarter end, up 9 percent from last year. That includes $629 billion of assets in fee-based investment management programs, a figure that grew by 24 percent. Morgan Stanley said management fees rose 4 percent to $1.9 billion from the previous year period.
Merrill Lynch on Tuesday reported all-time highs in wealth management revenue, profit and profit margins as well as in loans and asset management fees. In many important measures, then, Morgan Stanley continues to lag its archrival.
Merrill’s net revenue rose 10 percent to $3.74 billion, while client balances soared about 7 percent to $1.80 trillion. Average broker production climbed to $1.01 million from $895,000 last year. BofA’s wealth management division, which includes the U.S. Trust private banking unit, boosted profit by 38 percent to $758 million and generated a profit margin of 28 percent.
Merrill’s broker headcount, however, fell more precipitously. The ranks of financial advisers plunged by 1,005, or 6 percent, to 15,759 from the year-ago period. Exclude the associates employed by Bank of America’s branch-based Merrill Edge program, and the Thundering Herd was thinned by nearly 8 percent to 14,172 from last year.