Morgan Stanley announced plans Thursday to acquire discount brokerage and custodian E*Trade Financial in a deal expected to close later this year. Analysts and industry observers see the deal as a way to move downstream, capturing more of the mass affluent market, but also create an in-house channel for independent advisors through E*Trade’s RIA custody business.
On a conference call with investors Thursday morning, Morgan Stanley CEO James Gorman said that E*Trade’s RIA business was “relatively small and wasn’t an overall driver of the deal” but called the RIA channel “an interesting channel” primarily for referrals. E*Trade’s CEO Michael Pizzi, however, who will continue to run the E*Trade unit, was optimistic. “We see significant growth potential in the RIA business, and today, this just increases the amount of capabilities we're going to be able to bring,” he said.
For years, the brokerage industry has skirted the idea that there was a so-called exodus of advisors leaving the wirehouses to go independent. And yet, more advisors and clients are choosing the independent advice channel; it’s the fastest-growing channel in wealth management. You couldn’t blame Morgan Stanley for wanting to keep advisors in-house.
Last year, competitor Wells Fargo recognized the growth, and its subsidiary First Clearing partnered with TradePMR to launch a dedicated offering for fee-only RIAs.
And last year, another big Wall Street firm, Goldman Sachs, made a bigger bet on independent advice, with its acquisition of United Capital.
Will Trout, head of wealth and asset management at research firm Celent, said that Morgan Stanley's move was likely a bid to diversify the company’s offerings into the custody business and become a true one-stop financial shop for a spectrum of investors from mass affluent to high net worth.
Trout told WealthManagement.com that in the wake of the Schwab-TD Ameritrade deal, he sees this deal as somewhat similar to what Goldman has done in buying United Capital. "Morgan Stanley is buying the mine instead of the miners, to offer custody and tech tools to RIAs as part of a broader strategy to sell to clients all types of products.”
Morgan Stanley has been transitioning from a transaction-based model to a fee-based model for some time, said Trout. “Clearly the independent advisor model appeals to different types of clients than those who would gravitate toward Morgan Stanley—this expands distribution and gives it access to clients who typically wouldn’t walk through the doors of Morgan Stanley. Distribution is the name of the game.”
E*Trade, he said, “is about a lot more than self-directed brokerage.” E*Trade entered the business of offering custody and technology services to RIAs in 2018 when it bought Trust Company of the Americas.
“E*Trade realized that the discount brokerage play was ending and got into robos and digital advice but didn’t have the scale to achieve success in that market,” Trout said.
The proximity to the end client “confers pricing power,” Trout said, which is why companies like Vanguard are looking to build relationships with advisors beyond the kind of direct-to-consumer distribution platform. “The independent advice movement has gained speed and it makes sense that Morgan Stanley would want to distribute through RIAs and offer the whole suite of Morgan Stanley products” that way, he said.
In addition, he said, Morgan Stanley will seek to recoup its investment and cross-sell and upsell its products to E*Trade customers “to maximize wallet share” of E*Trade’s existing clients.
A letter to all wealth management employees Thursday from Morgan Stanley head of wealth management Andy Saperstein would seem to confirm at least some of this thinking. In it Saperstein wrote that the deal: “will give us access to a large pool of investors, many of whom are likely to need more comprehensive advice in the near future; others will transition over time.” He added that a core part of E*Trade’s growth strategy was to provide “higher-end advice to their self-directed brokerage clients” and that Morgan Stanley plans to “greatly accelerate [that strategy] in the near-term” with its financial advisors.
“There will be no disruption to our core Advisor operating platform and client-facing tools,” he said.
The news of the deal confirmed analyst expectations that in the wake of last fall’s Schwab-TD Ameritrade deal and the ensuing price wars between the discount brokers, E*Trade would be the next target for acquisition.
Morgan Stanley touted the deal as a deeper dive into the mass-affluent market. An earlier acquisition points in this direction as well: the 2018 purchase of stock plan administrator Solium Capital. Morgan has big plans for the company, which it has rebranded as Shareworks. It intends to convert 1 million of the 3 million mass affluent stock plan participants to Morgan Stanley wealth management clients within the next five to seven years.
UBS analyst Brennan Hawken wrote in a research note Thursday that the news is a clear indication that Morgan Stanley’s integration of its $900 million purchase “is going very well and this is a strong channel for customer acquisition and a logical extension of wealth management capabilities.”
“The strategic benefits of this deal [are] very clear, including strengthening the corporate stock plan business, providing a broader wealth management solution across more channels, and enhancing deposit funding/stability.”
But Wells Fargo Securities analyst Mike Mayo was sour on the deal, writing in a note Thursday that “the ability to combine the digital brokerage and banking platform with the legacy MS business is uncertain, especially after a decade of seeing smaller wealth clients leaving the platform for other providers and doing so by combining two different brand names.”
Mayo even lowered Morgan Stanley from Overweight to Equal Weight, saying that the deal wouldn’t give a lift to the company’s wealth business, which has lagged the industry in net new assets.
Mayo said that while the acquisition may help benefit Morgan Stanley through E*Trade’s “superior online trading…higher margins and lower funding costs, and complement its work place efforts and addressable universe,” the strategic potential would take time.
He also highlighted the cultural integration risks of taking on E*Trade’s employees.
Bank of America analyst Michael Carrier agreed with both Mayo and Hawken, writing in a note Thursday that the deal “makes strategic sense given shifting trends in wealth management (demographics, technology, etc.) though integration, culture/talent, client retention, and capital management will all be key ahead” for the combined company.
Meanwhile, Goldman Sachs analyst Richard Ramsden wrote in a note Thursday that from a strategic perspective, the move provides Morgan Stanley a complement to its wealth management business and further diversifies its revenues toward “less volatile earnings streams.” He added that E*Trade’s corporate services business, which makes up about a third of the company’s deposits, will “complement” Shareworks “and cement MS as the premier provider in corporate stock plan administration. We believe that this provides MS with a strong customer acquisition channel to penetrate the employee base of its existing corporate relationships for its wealth management business.”
The E*Trade deal will add $360 billion of client assets to Morgan Stanley’s existing $2.7 trillion. While approximately 200 RIA firms custody through E*Trade, largely via its 2018 TCA acquisition, it remains to be seen whether the new unit will stem the tide of brokers going independent. Morgan Stanley currently has more than 15,000 advisors.