Morgan Stanley said Thursday that its wealth management unit beat its profit expectations in 2017, and the bank set the bar higher for 2018, although not high enough for some analysts on the firm’s earnings call.
During its fourth quarter and year-end earnings call, Morgan Stanley reported that wealth management had record revenue of $4.4 billion in the fourth quarter of 2017, up from $4 billion a year ago.
The bank’s wealth management business benefited from a strong bull market, more assets landing in fee-based accounts (which are more lucrative than brokerage accounts) and a continued uptick in lending penetration. Transaction fees accounted for only 19 percent of the unit’s revenue in 2017, down from 30 percent in 2013.
It was also more profitable than it anticipated. In 2017, the wealth management unit had a record annual pre-tax margin of 25.5 percent after the bank projected between 23 and 25 percent.
The firm expects the performance to continue and that wealth management should achieve a pre-tax margin of 26 to 28 percent this year. All of the firm’s retention packages are set to expire by January 2019.
But without explicitly naming Bank of America, one analyst questioned why a primary competitor said just 24 hours earlier that a pre-tax margin of 30 percent was achievable. Bank of America CEO Brian Moynihan said during his company’s earnings call on Wednesday that the round number was possible through arbitrage and improvements to technology in his bank’s wealth management unit, but attached no timeline to the goal.
In response, Morgan Stanley CEO James Gorman said competitors’ wealth management businesses wouldn’t have a higher pre-tax margin than Morgan Stanley’s unless they had a higher deposit base. He said he remembered the days when analysts asked him when wealth management’s pre-tax margin would eclipse 15 percent (which it did in 2013 before moving steadily toward its current mark).
“I wouldn’t get ahead of the [28 percent] right now” because there is still uncertainty in what the market will do in 2018, Gorman said.
Another analyst questioned the conservative pre-tax margin estimate of 26 to 28 percent, in which Gorman was quick to correct him, “I don’t think the range of 26-28 percent is conservative ... just for context, 29 percent would be the first time in the industry.”
Gorman also reminded those on the call that while the wealth management business has grown a pre-tax margin and continued to invest in the unit, it has also reduced non-compensation expenses. He said, as an example, he would rather see the unit’s revenue grow 7 percent year-over-year with a pre-tax margin of 28 percent, than only achieve a higher pre-tax margin.
When the next analyst further questioned whether the projection was high enough, Gorman said the bank set the projection like it does all others—one it can expect to deliver on, rather than one that gets people excited but can’t be achieved.
Total client assets within Morgan Stanley’s wealth management reached $2.4 trillion at the end of the quarter, $1 trillion of which were in fee-based accounts. The brokerage currently has 15,712 advisors, down from 15,759 in the third quarter and from 15,763 in the fourth quarter 2016. Average annualized revenue per advisor is at $1.1 million.
