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Morgan Stanley, Merrill Lynch Benefit From New Money, Higher Interest Rates

Morgan Stanley's wealth unit boasted $110 billion in net new assets over the first quarter, while Bank of America Merrill Lynch stressed it hit a record high of net new relationships, despite a 3% revenue dip.

Falling equity markets hit the top line at Morgan Stanley Wealth Management and Merrill Lynch a bit differently compared with a year ago, as reflected in recent earnings reports, even as net new assets flowed in, clients moved to cash and net interest income from higher interest rates rose considerably at both.

Net new assets coming into Morgan Stanley’s wealth management unit more than doubled during the first quarter of 2023, according to the report released today, though the flow still lagged the same time period last year by some 23%.

The $110 billion in net new assets indicated a “flight towards quality” and put Morgan Stanley on track for its projection of $1 trillion in new assets every three years, according to Chief Financial Officer Sharon Yeshaya.

Net wealth revenues were $6.6 billion, an 11% boost over the same time period last year. That was buoyed in part by a 40% year-over-year boost in net interest income to more than $2.1 billion, which Yeshaya attributed largely to the Fed’s interest rate hikes. 

Assets came from “multiple channels,” but Yeshaya said there was particularly strong growth in advisor-led channels from existing clients. Like UBS and now Wells Fargo, Morgan Stanley did not release numbers on advisor head count.

According to Yeshaya, clients increased their cash equivalent allocations by more than 60% over the past year, though the division saw a 3% decline in deposits (most investable assets remained within Morgan Stanley, she said). Currently, advisor-led assets in cash and cash equivalents are at a record 23% allocation in portfolios, compared with an 18% historical average (though Yeshaya predicted this would ebb as market volatility lessens). 

Year-over-year revenue dipped slightly for Morgan Stanley as a whole, given falling equity markets and less income from the investment divisions, from $14.8 billion to $14.5 billion, and first-quarter net income dipped 19% year over year; the fall was buoyed somewhat by the 8% rise in net income at the wealth unit. 

CEO and Chairman James Gorman framed the first quarter as “uneventful” for Morgan Stanley. He felt the risk of a widespread banking crisis had been reduced by regulators in the U.S. and Europe who led the “cauterization” of wounds left by Silicon Valley Bank’s collapse.

Gorman said he does not expect any interest rate cuts in 2023, and warned there may still be one or two increases forthcoming. While a “modest” recession was possible, he said the prospect of untamed inflation leading to a deep recession looked “less likely” at this point. 

Overall, Gorman felt the current climate felt “surprisingly benign” when taking into account the pressure points of the past few years, from COVID-19 to inflation and the war in Ukraine.

“It kind of reminds me of the Rolling Stones song, you can’t always get what you want, but you get what you need,” he said. “Morgan Stanley, coming out of this, we’re getting what we need.”

While year-over-year wealth management revenue rose at Morgan Stanley, it dipped slightly at Merrill Lynch, falling 3% in the first quarter compared with the same time period last year. The bank attributed the slight dip to market declines, according to its own Q1 earnings report. But the drop could have been steeper without a record net interest income of $1.9 billion on the backs of the rate hikes, a 12% boost from the first quarter in 2022. 

The wealth division also boasted an all-time record of 14,500 net new client relationships, an 88% boost over the rate of new relationships in the prior year's time period, and a 61% jump from 2022’s fourth quarter.

Client balances in the global wealth and investment management division stood at $3.5 trillion, down 5% from the year before, while assets under management stood at $1.5 trillion, a $104 billion decline (though AUM was up by $70 billion from the prior quarter). Advisor head count remained steady, dropping by only 30 employees from quarter to quarter, and rising 5% over the year.

But the top-line numbers at parent company Bank of America held better news: Net income for the institution as a whole rose 15% to $8.2 billion over the year, with pretax income up 15% and revenue up 13% to $26.3 billion in total. In an earnings call Tuesday morning, CFO Alastair Borthwick stressed the underlying movement in the wealth management space shouldn’t be overshadowed by the revenue dips in the division.

“If you go to the wealth management business, this was a record quarter for net new households for Merrill Lynch and a record for the private bank this quarter,” he said. “That tells you we’re offering people something that’s valuable.”

Late last month, former Merrill Wealth head Andy Sieg left the wirehouse for a role leading Citigroup’s wealth management division. Bank of America installed Lindsay Hans and Eric Schimpf to replace him as presidents and co-heads of Merrill Wealth. 

Hans recently took over Merrill’s Private Wealth division, succeeding 32-year Merrill veteran Don Plaus; before that, she’d led the firm’s Northeast sector. Schimpf was previously a division executive on the West Coast and the co-head of the enterprise advisor development program.

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