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3 DOL Fiduciary Takeaways From Morgan Stanley’s Q1 Earnings

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Morgan Stanley reported strong results earlier this week, with its first-quarter net income jumping 70% year over year, to $1.93 billion, and revenue increasing 25% to $9.75 billion.

Meanwhile, the wealth unit had an even bigger jump in net income, which rose 31%.

On a conference call with equity analysts, CFO Jonathan Pruzan gushed about its performance.

(Related: 11 Best & Worst Broker-Dealers: Q4 Earnings)

The unit’s pre-tax margin, 24%, was the highest since the firm acquired Smith Barney, he said. “Importantly, drivers of this business are healthy. We witnessed increased fee-based asset flows, additional lending, better client engagement and [limited] FA attrition.”

Plus, total client assets hit $2.2 trillion, and fee-based assets grew 6% to $927 billion, including net asset flows of $19 billion.

“This represents the highest fee-based asset flows since the fourth quarter of 2014,” he added.

1.  DOL, Fee-Based Momentum Up

Rival Merrill Lynch said early on that it would move to a fee-only structure to address the Department of Labor’s fiduciary rule, which is now delayed. Recently, though, the wirehouse conceded that commissions-based accounts might make sense for some clients.

For its part, Morgan Stanley insists it has been “very consistent in saying that we want to provide our clients choice, and we will continue to do that with compliance solutions if DOL goes into effect,” Pruzan explained.

In general, the wealth unit has “good momentum broadly in the business,” with fee-based assets and other benefits.

“[All] of that momentum is playing well in our system, in our network,” the CFO said on the call.

2.  Financial Advisor Movement Slows

While fee-based flows are up thanks to DOL, the movement of advisors has generally come to a standstill.

“It probably has had a chilling effect on recruiting, [and] attrition has been low,” according to Pruzan.

The latest figure for Morgan Stanley advisors is 15,777, which the firm says is up 14 advisors from Q4’16 but down 111 (or 1%) from Q1’16.

“We are an attractive place to work, and we’ve seen some good opportunities to bring in talent, so that’s all been positive …,” the CFO said.

Like its rivals, though, the firm has seen its fair share of departures. For instance, Raymond James recently recruited one of its registered reps in Trinity, Florida, with about $106 million in client assets and over $1 million in yearly fees and commission.

3. Some Cost Controls Working

In terms of non-compensation costs, some of which are tied to DOL implementation and a shift to fee-based accounts, Morgan Stanley is managing them “aggressively … across the firm,” he says.

“Wealth has been very good at that over the course of the last several years, improving the margins from below 10% to now its current 24% level,” Pruzan explained.

(Related: 11 Best & Worst Broker-Dealers: Q4 Earnings)

There’s “very strong expense discipline,” and the firm expects this level of margins “to continue.” The wealth unit’s pre-tax margin of 24% in Q1’17 is up from 22% in Q4’16 and 21% in Q1’16.

It does, though, still lag behind Bank of America-Merrill Lynch’s 27% figure.

When it comes to average yearly fees & commissions per FA, though, Morgan tops Merrill by a hair at $1,029,000 vs. the Thundering Herd’s $999,000. (Merrill says that its level for veteran advisors is around $1,300,000.)

Still, some analysts with KBW – who had anticipated Morgan Stanley’s wealth unit would produce a pre-tax margin of 26% in the first quarter – remain concerned about high compensation expenses, noting that overall expenses failed to meet their estimates. 

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