October 20, 2010

Morgan Stanley Advisors Reverse Asset Flows as Firm Sees Q3 Loss

Despite poor corporate results, Morgan Stanley's 18,119 advisors bring in $5 billion in net new client assets

Morgan's combined client assets have surged ahead of Merrill Lynch's. Morgan's combined client assets have surged ahead of Merrill Lynch's.

After experiencing client withdrawals of nearly $8 billion in assets during the second quarter, Morgan Stanley’s U.S.-based advisors produced net inflows of $2.4 billion in the third quarter, the company said Wednesday.

When non-U.S. advisors are included, the combined FA force had net inflows of $5 billion vs. outflows of $5.5 billion in the previous quarter and outflows of $11.9 billion in the third quarter of 2009.

“Morgan Stanley advisors' results are impressive,” explained Mark Elzweig, an executive search consultant in New York, in a phone interview. “Keep in mind that the firm still has two parallel platforms [associated with its ’09 acquisition of Smith Barney], which have yet to be merged.”

The full brokerage firm and investment bank, however, said it had a net loss of $91 million, or $0.07 per diluted share, in Q3 vs. third-quarter 2009’s profits of $0.38 per share. The loss reflected trading losses as well as a $229 million write-down due to the bank’s decision to dump its investment in casino company Revel Entertainment Group.

In addition to the special charges for Revel, Morgan Stanley in its Q3 2010 release also saw a drop-off in trading profits, similar to the poor market conditions that other banks have reported this week as the third-quarter earnings season kicks off. Analysts’ expectations had called for earnings of $0.19 per share.

Retail Results 

Morgan Stanley financial advisors grew total client assets by 7% over last quarter and 5% over year-ago results to $1.6 trillion. Thus, the firm’s 18,100 FAs manage $88 million in assets on average. Combined client assets at Morgan Stanley now top Merrill Lynch’s $1.5 trillion; however they fall short of Bank of America’s total retail-advisor assets of $2.2 trillion (when U.S. Trust results are included). In addition, Merrill advisors manage $99 million in assets on average.

“Morgan Stanley has a lot of high-quality advisors, and they control significant pools of assets,” explained Elzweig.

As for production, or fees and commissions per rep, Morgan Stanley FAs produced $686,000 in average annualized sales in the third quarter up from $679,000 in the second quarter and $662,000 last year.

While improving, this still puts Morgan Stanley Smith Barney advisors behind those at Merrill, who averaged $851,000 in annual fees and commissions in the third quarter.

In terms of headcount, Morgan Stanley lost 22 advisors and ended the quarter at 18,119. It is down 41 FAs from last year.

However, it is still ahead of Merrill’s 15,340 and Bank of America’s total advisor force of 16,790 financial advisors.

Morgan Stanley’s third-quarter results, which were reported one day after BofA-Merrill’s, “are another example of the retail side of a major firm holding its own – doing a good job despite volatile markets and the challenge of integration after a merger,” says Elzweig.

The two firms have gone through ongoing home-office turf battles and plenty of layoffs, he adds, and this has reduced the access advisors have to product specialists, especially at Morgan Stanley.

Global Wealth

Sales for Morgan Stanley’s advisors and the broader global wealth management group (GWMG) were $3.1 billion in the third quarter, up 2% from last year and 1% from the previous quarter. However, for the past nine months, sales are up 49% year over year to $9.3 billion.

Net income for the GWIM unit was $144 million vs. $105 million a year ago and $110 million in the second quarter.

Advisors’ fee-based assets now represent 27% of total client assets, or $437 billion. In addition, assets managed for clients with $1 million or more at Morgan Stanley represent 73% of total client assets.   

Company-wide net revenues were $6.8 billion for the current quarter compared with $8.5 billion a year ago. Negative revenue of $731 million related to Morgan Stanley’s debt-related credit spreads marred the company’s Q3 2010 earnings. That compares with negative revenue from debt-related spreads of $878 million in Q2 2010.

The bank reported operations income of $313 million, or $0.05 per diluted share, compared with income of $936 million, or $0.50 per diluted share, in Q3 2009. The results included

$176 million, or $0.12 per diluted share, associated with the repatriation of non-U.S. earnings at a cost lower than originally estimated.

Sales and Trading Business Was Muted

"Although we continued to make progress across some key businesses this quarter, our results in aggregate clearly do not reflect the true potential of Morgan Stanley's global client franchise, and I am not satisfied with our overall performance,” said President and CEO James Gorman in a statement.

Gorman acknowledged that the sales and trading business was “clearly muted,” though he also pointed to Morgan Stanley’s improved performance and positive flows in both the Wealth Management and Asset Management units.

“We continue to invest in our people and our platform, and we are executing our client-focused strategy, including the plans we announced today regarding our FrontPoint business,” Gorman said in the statement released Wednesday. “While we still have considerable work to do across the firm, Morgan Stanley's client franchise remains well positioned to benefit as the environment stabilizes and investors return to the market."

Morgan Stanley Q3 2010 Highlights

In its FrontPoint Partners announcement, Morgan Stanley said it is restructuring its ownership of the firm so that FrontPoint senior management and portfolio managers will own a majority equity stake in FrontPoint and Morgan Stanley will retain a minority stake. FrontPoint will replace Morgan Stanley affiliates as the investment advisor and general partner of the FrontPoint funds. The restructuring is expected to close in the fourth quarter of 2010.

Other highlights for the quarter included:

  • Investment banking revenues were $1.0 billion. Morgan Stanley ranked No. 1 in global initial public offerings, No. 2 in global completed M&A, No. 3 in global announced M&A and No. 3 in global equity, according to Thomson Reuters.
  • Sales and trading net revenues were $1.4 billion, including the negative revenue of $731 million.
  • Global Wealth Management delivered net revenues of $3.1 billion, with client assets of $1.6 trillion and 18,119 global representatives. Net new assets for the quarter were $5.0 billion.
  • Asset Management reported net revenues of $802 million, which included gains of $203 million related to principal investments held by certain consolidated real estate funds.
  • Compensation expenses of $3.7 billion decreased from $4.9 billion a year ago.

Read about Morgan Stanley’s Q2 2010 earnings at AdvisorOne.com.

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