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Morgan Stanley CEO: Zero Commissions Won't Hurt Advisory Fees

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Morgan Stanley Chairman & CEO James Gorman Morgan Stanley Chairman & CEO James Gorman (Photo: AP)

Morgan Stanley Chairman and CEO James Gorman said online brokers’ recent move to zero commissions shouldn’t put much pricing pressure on financial advice.

“I mean, at the level the clients are paying, I think it’s in the mid-70 basis points on dollars of assets, it’s a great value equation,” Gorman said during a call with equity analysts early Thursday. ”I mean the advice pricing holds up as long as clients are getting value.”

Putting research, trade execution, financial planning, charitable giving, trust and estate planning and accounting is “complicated stuff,” he explained. “And being wrong on this and the tax implications of being wrong absolutely overwhelm a few basis points on the fees. So, having high-quality advisors giving high-quality advice is in my view a winning strategy.”

Gorman said, “The real question is for what level of assets is it relevant.” His response is that investors with under $100,000 do “not need a financial advisor.”

The “sweet spot for what we’re doing for our business” is generally between $1 million and $10 million and above $10 million, he explained. “That’s where the growth is, and in my view, that is where the advice fee is very fair and very reasonable given the value created.”

The timing of zero commissions “surprised” him, though the actual shift itself did not.  ”I think, given the backdrop with where rates are, it was curious timing, but it is what it is,” Gorman said on a call with earnings analysts on Thursday.

Wealth Management Earnings

Morgan Stanley’s Wealth Management unit posted slightly stronger profits in the latest quarter — $962 million, up 5% from a year ago — though sales fell 1% year over year to $4.36 billion. Its pretax margin, though, improved to 28.4% from 27.1% a year ago.

“The Wealth Management business is powerful. At $2.6 trillion of assets, annualizing over $17 billion in revenues, and margins at historic highs — the business is clearly stabilizing the firm,” Gorman said. “But the most attractive part — every incremental dollar of revenue is arriving at a higher margin than the margin of the existing business.” 

Morgan Stanley’s advisor headcount dropped to 15,553, down 80 from the previous quarter and 102 from a year ago. Advisors’ average yearly fees and commissions weakened 1% both from the prior quarter and year-ago period to $1.18 million.

Rival Merrill Lynch said its pretax margin was 27.6% in the quarter, and its average yearly fees and commissions are $1.10 million for 17,657 financial advisors. Its operations are part of Bank of America’s Global Wealth & Investment Management unit, which grew profits 8% year over year to $1.1 billion for Q3’19, while growing revenue 2% to about $4.9 billion.

Morgan Stanley’s total client assets are nearly $2.6 trillion vs. about $2.4 trillion for Merrill and $2.9 trillion for BofA’s global wealth unit.

It reported net fee-based asset flows of $15.5 billion in the third quarter — down 4% from last year’s $16.2 billion but up nearly 60% from the prior quarter’s $9 billion.


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