January 20, 2014

Morgan Stanley Aims for Higher Wealth Management Profits

CEO James Gorman says its operations, which trail those of Merrill Lynch, should top 22% by late 2015 by selling more and keeping costs in line

Morgan Stanley CEO James Gorman. (Photo: AP) Morgan Stanley CEO James Gorman. (Photo: AP)

Morgan Stanley (MS), which reported a fourth-quarter drop in net income on Friday, has outlined aggressive plans to boost its wealth-management results — namely a profit margin target of 22% to 25% by year-end 2015.

In the fourth quarter, the company had net revenues of $7.8 billion vs. $7 billion a year ago. The wealth management unit produced $3.73 billion in revenue in the quarter, up from $3.33 billion a year earlier.

Net income overall fell to $133 million, or $0.07 per share, from $568 million, or $0.29, in the year-ago quarter. Excluding one-time items such as $1.2 billion in funds that had to be set aside for potential legal expenses, the bank earned $0.50 per share, beating estimates.

“Our fourth-quarter results demonstrated the consistency embedded in our business model, as revenues increased year-over-year in all three of our business segments,” said Chairman & CEO James Gorman, in a statement. “We look forward to further progress on our strategic goals as we move into 2014 with strength and momentum.”

Morgan Stanley’s wealth management results for the latest period included a pretax margin of 19%, or 20% excluding a charge.

Rival Bank of America-Merrill Lynch (BAC), though, is already ahead of Gorman’s 2015 target. Its wealth management unit had a profit margin of 26.6% in the fourth quarter.

Morgan Stanley has had to fund costly IT and other projects to integrate the Smith Barney franchise. It also had to buy Citigroup’s share of the venture.

The unit’s 2013 margin was 18% vs. 10% in 2011 and 7% in 2009. Gorman sees the unit improving its results via cost discipline and revenue growth.

Wealth management should benefit from growing deposits and net interest income. Plus, the bank plans to boost lending to clients via securities-based credit lines, for instance, and mortgage loans and home-equity products.

The wealth management unit ended the year with client assets of $1.9 trillion. Fee-based assets, 37%, were nearly $700 billion, while fee-based asset flows were close to $52 billion for the year.

Its advisors have average client assets of $116 million, and average annualized revenues per advisor of $905,000.

Morgan Stanley says it has 16,456 advisors — up 104 from a year ago but down 61 from the third quarter.

BofA said it had 15,316 financial advisors, including some in its consumer and business banking operations. The number of its traditional Merrill advisors stands at 13,771, and these FAs had yearly production of $1.005 million in 2013. (BofA also has about 2,000 US Trust wealth professionals.)

Investors seem bullish on Gorman and his plans, as they pushed Morgan Stanley shares up 4% on Friday to $33.40. That tops the shares' best closing price of the past four years, which was $32.92 on Jan. 7, 2010, during the CEO's first week on the job.

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