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Portfolio > Portfolio Construction > ESG

Morgan Stanley CEO Explains Thinking Behind Eaton Vance, E-Trade Deals

By Jeff Berman

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Providing clients more investment choices, including whether they get full service, all-digital service or both, is absolutely crucial, and that’s one reason it decided to buy E-Trade and Eaton Vance, according to James Gorman, CEO and chairman of Morgan Stanley.

“If you don’t give them that choice, they will take their money elsewhere, so we wanted to give them choice,” he said Monday during the Securities Industry and Financial Markets Association virtual Annual Meeting.

Morgan Stanley announced earlier this month that it entered into a definitive agreement to acquire money manager Eaton Vance, which has over $500 billion in assets under management, in a deal with an equity value of roughly $7 billion.

“Eaton Vance is a perfect fit for Morgan Stanley,” Gorman said at the time, noting: “This transaction further advances our strategic transformation by continuing to add more fee-based revenues to complement our world-class investment banking and institutional securities franchise.”

Eaton Vance “gives us tremendous product” that is “complementary to the Morgan Stanley platform,” he said during an online SIFMA session Monday morning.

Once Eaton Vance is consolidated into Morgan Stanley, the firm’s pro forma revenues across all wealth and asset management will be $25 billion to $26 billion a year, he said, noting its institutional business does over $20 billion a year.

The Eaton Vance deal was announced just six days after Morgan Stanley wrapped up its purchase of E-Trade for $13 billion.

The E-Trade platform, among other things, “gives us a very strong derivative option trading business, it gives us a digital bank which we did not have,” it provides Morgan Stanley with “more durable wealth management-type revenues and we’ll be able to put some of our product on the E-Trade system,” Gorman said Monday.

It was just a “win-win for both firms,” he said, adding: “We’ll keep the E-Trade brand.” Some of E-Trade’s technology is “more sophisticated than what we have,” he conceded. But Morgan Stanley’s electronic trading in its institutional business “will go very well with their options trading business,” he said.

ESG Investing ‘Not a Fad’

Morgan Stanley, meanwhile, is offering clients a growing number of environmental, social and corporate governance focused investing options, Gorman said Monday.

ESG is “not a fad” and “is not going away,” he said, noting “our clients want to invest in ESG.”

Some investors’ portfolios will be “completely ESG-driven, some will be partial” and others won’t be driven by ESG at all for the foreseeable future, he predicted.

And, although ESG still represents a very low, “single digit” percentage of business now, it’s “exploding” and will continue to grow, he predicted.

The Market and COVID-19

This has been a “time of historic turmoil and disruption,” but the financial sector has held up well, especially when you compare it to what happened during the 2008 recession, Gorman also said Monday.

However, there is still “a lot of turmoil and uncertainty,” and “we’re moving into one of the most tumultuous elections in our history, if not the most,” he said. On top of that, “we have a very fractured country,” the virus will continue to be around for several more months and, although the economy is recovering, it’s “from a low base” because of the major hit it took early on during the pandemic, he said.

Because of that, he warned that “a prudent investor doesn’t try and get greedy,” he said, adding Morgan Stanley is managing risk “prudently.” Although some are being more aggressive than it is, “we don’t care — if that means we lose some revenues from that, we’d rather be secure,” he said.

He warned that although “there are some extremely healthy pockets of the market,” there are other pockets that are struggling.

Wealth management clients have been “much more sober” during the pandemic, he said, adding he was surprised how “little variation” there has been in their activity.

There has, however, been an “explosion,” he said, of small accounts being opened at companies including E-Trade, which has seen “unbelievable account growth and asset flows coming in” as a result, he added.

“Our business held up throughout” the COVID-19 pandemic, he said, attributing at least part of the success to the strength of the systems it put in place and the technology supporting its business.

The $4 billion a year that Morgan Stanley has invested on technology has “paid dividends,” he said.

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Jeff Berman

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