Morgan Stanley financial advisors should expect more cost-cutting in the global wealth management division in coming quarters—possibly in the guise of cuts to staff or financial advisors. On a second-quarter earnings conference call Thursday morning, Morgan Stanley CEO James Gorman said that while revenues, flows and assets are all strong in the global wealth management group, the firm remains very focused on expenses in that business. “Margins must improve and do so soon,” he said.
Margins for the global wealth management group hit 9.3 percent in the second quarter, up about 250 basis points year over year, said CFO Ruth Porat. Gorman set a long-term profit margin target of 20 percent for the division shortly after Morgan Stanley acquired Smith Barney in a joint venture with Citigroup. Margins were depressed a point or two by a one-time FDIC assessment of approximately $45 million.
Morgan Stanley’s global wealth management group, which includes its joint venture with Citigroup in Smith Barney, reported pre-tax earnings of $322 million on revenues of $3.5 billion. That’s up from $207 million in net income on $3.1 billion in revenue in the year-ago quarter. Firm-wide, Morgan reported a pre-tax loss of $558 million on revenues of $9.3 billion. Average annualized revenue per Morgan advisor rose to $785,000 from $679,000 in the year-ago quarter. Average client assets per Morgan advisor were $97 million.
“Greg is pushing very hard to help drive margins in Smith Barney,” said CFO Ruth Porat, referring to Greg Fleming, president of Global Wealth Management. Across the firm, executives are taking a close look at how they can use technology to reduce expenses, what Morgan Stanley can outsource, the firm’s legal structure. But it also is “very focused on headcount,” she said. “We are focused on reducing underperforming employees,” she added, offering the reduction in headcount of FAs at MSSB during the quarter as an example. Total financial advisor headcount declined by a net 160 during the quarter to 17,638, “as we continued to prune underperformers,” the company said in a release.
It’s All About The Assets
Total clients assets rose to $1.7 trillion for the quarter on market appreciation and net asset inflows of $2.9 billion, a marked improvement from outflows in the year ago quarter, said Porat. And almost a third ($539 million, or 32 percent) of Morgan’s client assets correspond to clients with $10 million or more at the firm. Total fee-based assets reached $509 billion, up from $396 in the year-ago quarter, and now accounting for 30 percent of total client assets. Net fee-based asset inflows were $45 billion over the past 12 months, said Porat on the call.
One analyst, speaking on the conference call, was not impressed with Morgan’s asset inflows. That $2.9 billion is quite a bit weaker than net asset flow numbers recorded by some of the pure play brokers like TDAmeritrade ($7.9 billion) and Schwab ($10.6 billion), he said on the call, and asked when Morgan might see more substantive flows. Gorman noted, however, that full service firms tend to have larger outflows in the second quarter than the pure play brokerages because of tax season. In the first quarter, Morgan reeled in net new assets of $11.4 billion. Gorman also said that the quality of new assets is very important. “What really matters is net new annuitized money, versus transaction assets.”
Integration of Smith Barney, while growing assets and margins in the wealth management business, is high on Gorman’s priority list. It was one of 10 key steps Gorman outlined 18 months ago that Morgan Stanley needed to achieve to restore the firm to the strong financial position it has historically held, he said on the call.
So far, the integration is proceeding apace, Gorman and Porat said. Morgan Stanley has been spending $80 million to $100 million on integration in recent quarters, and spent $98 million on integration in the three months ended June 30.
The integrated technology platform, which was scheduled to be completed by the third quarter, is ready, said Porat. During the coming third quarter the firm will move all legacy Morgan Stanley advisors onto that new platform. “We are very much on track with that,” said Porat. The next step will be to train the legacy Smith Barney advisors and move them onto the platform, which will begin at the end of the third quarter and continue into next year. “One of key elements to increasing profitability is completion of the integration,” she said. Morgan margins will begin to improve as integration spending rolls off toward the second half of next year, she added. “We will have incremental work with the private wealth management people at Morgan after SB guys are moved onto the platform.”
Gorman added that Morgan Stanley will be able to cut costs by ridding itself of a lot of “dead” real estate once the systems are integrated. Right now, financial advisors and employees cannot be moved out of redundant Smith Barney branches into Morgan Stanley offices because their technology systems and information isn’t available. Gorman said the firm has not quantified whether or how many redundant operations and systems employees they might have, but that work will be done when they’re all on a single platform.