Morgan Stanley (MS) Chairman and CEO James Gorman said Friday that the industry was through the mayhem of the financial crisis that led many brokers to switch firms. Plus, with consolidation in the industry, there are fewer firms for advisors to jump to.
If “you look at where the industry, the wealth management industry now is, it’s very concentrated. And during the period of turmoil of the crisis, post-crisis and then our acquisition of Smith Barney and various staggered pieces that we hurdle on the way, there was a lot of attrition, a lot of moving people between different firms,” Gorman explained on a conference call with analysts posted online.
The movement created a burden for both firms and investors. “That is the tax on the industry obviously, and it’s inconvenient for clients in many cases,” Gorman said.
Such turmoil is no more, according to the executive, which means lower costs for brokerage firms. “But that level of turnover has dropped significantly, and we expect it to continue to drop,” he shared. “So that reduces your overall compensation costs, because obviously recruiting deals can be very expensive, number one.”
For Morgan Stanley, its merger with Smith Barney — now complete — is producing desired results on the bottom line as the strengths of the two firms can be better taken advantage of by its 16,500 advisors, the company leader says.
“No. 2, the strength of the old Smith Barney business at its core was its managed money program, and the strength of the Morgan Stanley business at its core was its capital markets capability, which is based upon Westchester,” Gorman said. “And we are continuing to see each of those strengths sort of populate the other side of the house. So it’s now become together as one firm.”
This growth should add to results going forward, he notes. “And that’s why you are seeing so much growth in the managed money side, and you are seeing very good retail distribution of institutional underwriting,” Gorman said. “So I think just fundamentally it’s a more robust business and the broader industry structure is more accommodating to better performance over time."
On Friday, Morgan Stanley said its third-quarter earnings from continuing operations nearly doubled to $1.01 billion vs. $560 million. Revenue grew about 7% to $8.1 billion from the year-ago period, excluding debt value adjustments.
The bank saw its equity sales and trading boost revenue to $1.7 billion from $1.3 billion in the year-ago period. Its fixed-income and commodities trading revenues, however, declined sharply to $835 million from $1.5 billion in the third quarter of 2012.
“Our strategy to combine a world-class investment bank with the stability of the largest U.S. wealth management franchise and strong investment management is enabling us to deliver exceptional advice and execution for our clients as well as stronger returns for our shareholders,” said Gorman, in a press release. “Overall, our stronger year-over-year revenues and net income reflect the progress we have made to position the firm well for the future.”
Wealth management operations at the investment bank, which account for 43% of total sales, grew 8% year over year to almost $3.5 billion. And the unit’s net income jumped to $430 million, a 32% gain over last quarter and nearly double the year-ago period’s results.
The number of advisors at Morgan Stanley grew 1% to 16,517 in the third quarter from 16,321 on June 30 and 16,378 a year ago. The wealth-management unit has seen a number of highly productive advisors depart to rival firms this year but continues to attract FAs.
For instance, in early November Theresa Chacopulos moved to the firm from Wells Fargo Advisors (WFC) in Scottsdale, Ariz., where she had over $1 billion in client assets. Also joining from Wells recently was the Costantino Group of Binghamton, N.Y., which had assets of $123 million and yearly fees & commissions of $1.28 million.
Francesca Zavolta left Barclays and moved to Morgan Stanley’s office on East 52nd Street in New York. He’s managed close to $75 million in assets and had $1.26 million in production for the past 12 months.
Morgan Stanley says its advisors had trailing-12-month production of $848,000 on average, down 2% from the prior quarter but up 8% from last year. Rival Merrill Lynch said earlier this week that its veteran advisors have about $1.3 million in yearly production, while its overall average advisor production is $1 million).
Total client assets were $1.83 trillion at quarter end (vs. $1.85 trillion for Merrill Lynch and $2.28 trillion for Bank of America’s (BAC) overall wealth-management operations).
Client assets in fee-based accounts at Morgan Stanley were $652 billion, an increase of 22% from last year. Fee-based asset flows for the quarter were $15.0 billion, a 50% improvement from the second quarter and a 121% increase from the prior year. (Flows in Q3 at Merrill $13.3 billion.)
“With our high-margin predictable wealth management business such a significant percent of our portfolio, we have a significant shock absorber in weaker markets,” said CFO Ruth Porat on a conference call with analysts. “In addition, we expect that our earnings will be even more predictable with the ongoing execution of our bank strategy.”
Check out ThinkAdvisor's Q3 2013 Earnings Calendar.