Morgan Stanley’s wealth management business reported net new assets of $36 billion in the third quarter, down 60% from the second quarter and 45% from a year-ago.
On a call with analysts, CEO James Gorman acknowledged the asset growth was lower than previous quarters, but said these numbers tend to bounce around. And the firm said it represents an annualized growth rate of over 7%.
“In any quarterly period, they're always idiosyncratic things,” he said. “This year we've had two quarters where we had some surprise on the upside and in aggregate for the year, we're total net new assets of $235 billion year-to-date. Our annualized growth rate is at the high end of the 5% to 7% range that we've been looking at. And it's consistent, in fact, it's spot on with our three-year target of a trillion dollars for net new money.”
The wealth business ended the quarter with a total client assets of nearly $4.8 trillion down 2% sequentially and up 16% from a year ago. Financial advisor-led assets were nearly $3.8 trillion, down 1% sequentially and up 14% from a year ago.
Despite the slower growth in new assets, Morgan Stanley CFO Sharon Yeshaya said the firm is attracting new clients and new advisors, especially as it continues to invest in its tech platform.
“The investments that we've made across the technology for wealth management has been what's been able to attract new recruits,” she said. “So if you talk to recruits about why they come to Morgan Stanley, it's the projects they can offer, it's the technology that we have, it's the ability to work with the clients. So you're seeing that continue and then you're also seeing new client acquisition through the funnel.”
Net revenues for wealth management were $6.4 billion for the third quarter, down 4% sequentially and up 5% from the year-ago period, due to increased asset management revenues on higher average asset levels from a year ago, the firm said.
Profits before taxes were $1.7 billion, up 2% from the prior quarter and up 4% from the third quarter 2022. The wealth business reported a pre-tax margin of 26.7%, up from 25% in the second quarter and down slightly from 27% a year ago.
Net interest income (NII) in Morgan Stanley’s wealth division was down 9% from the second quarter and 3% from a year ago to nearly $1.95 billion. The firm attributed the dip in NII to “changes in deposit mix,” offset by higher interest rates.
“The wealth management business model is focused on steady asset aggregation, delivering strong solutions and advice to clients, while growing durable fees and expanding margin through the cycle,” said Yeshaya. “We are continuing to invest in our industry-leading position and the sustainability of our long-term growth. As the backdrop recovers, advisors remain well-positioned to capture greater asset opportunity supported by our multi-channel model that was built to attract new client relationships.”
Yeshaya said the firm’s retail clients have 23% of their assets in cash, 5% higher than the 18% historical average. But that has started to change.
“The last four months—in consecutively, we've seen that movement into the market. This quarter alone, we began to see alternative growth in the new products, the growth in transactional revenues. We haven't seen that since the first quarter of 2022 before you started this rate hike cycle.”
Compensation expenses rose slightly to approximately $3.3 billion from $3.2 billion in the year ago quarter, based on “higher compensable revenues and expenses related to certain deferred compensation plans linked to investment performance,” according to the firm. Morgan Stanley does not release information on advisor headcount.
Overall, Morgan Stanley posted third quarter GAAP earnings per share of $1.38, beating analysts’ expectations by 9 cents, on revenue of $13.27 billion, up 2.2% year-over-year, beating expectations by $50 million, according to SeekingAlpha.com.
In May, Gorman, who became CEO of Morgan Stanley in 2010, announced he’d be stepping down from the role within a year (though he expected to serve as executive chairman “for a period of time” after that). Potential in-house successors include investment management head Dan Simkowitz, as well as Ted Pick and Andy Saperstein, co-presidents and heads of the asset and wealth management divisions, respectively.
Morgan Stanley planned to eliminate about 3,000 jobs by the end of the second quarter, but excluding financial advisors and the wealth management support staff. Excising those employees, the cuts amounted to about 5% of bank staff.
Earlier this week, Merrill Lynch projected it was on track for a record year in net new client relationships, having added approximately 33,500 in 2023 thus far, according to its third quarter earnings. Revenue was up 1% to about $5.3 billion for the quarter on the backs of asset management fees, but was slightly offset by the bank’s own dip in NII.
Wells Fargo’s NII was also down year-over-year, according to its third quarter earnings, with a 7% dip during that period attributed to “lower deposit balances as customers reallocated cash into higher yielding alternatives, as well as lower loan balances, partially offset by the impact of higher interest rates.”