By Andrew Welsch
Morgan Stanley’s wealth unit fell short of its target for pretax profit margin in the fourth quarter, but the goal is still achievable and the company has a plan to hit its target, said Jed Finn, head of wealth management at Morgan Stanley.
“We can add significantly more clients and assets without having to add significantly more to the infrastructure,” said Finn, who spoke at the BofA Securities Financial Services Conference on Thursday.
Morgan Stanley has finished integrating recent acquisitions, which frees up resources, Finn said. It now has a robust platform for serving a wide range of clients and customer needs. Plus, it has a pipeline of future full-service wealth management clients.
“Once the relationships are here, they grow over time,” he said. “It might start in a brokerage account, but it then grows into an advisory relationship. Or maybe it starts with a checking account. Or maybe it starts with philanthropy. Once the relationship is established, we see them adding more assets.”
The wealth management update is of keen interest to investors given Morgan Stanley’s mixed fourth-quarter results and the key role the wealth unit plays at the company. The wealth management unit reported a fourth-quarter pretax margin of 24.9%, well below its 30% target. The stock is down 7.38% this year.
In the wake of the financial crisis, Morgan Stanley shifted its business mix to favor wealth management over investment banking because the former generates steadier revenue. “Morgan Stanley has built a more stable business model, and its shift to wealth management from investment banking will continue to be a main part of the company’s story over the long term,” Morningstar analyst Michael Wong wrote in a research note in January.
Morgan Stanley is now one of the nation’s largest wealth management companies with more than $5 trillion in client assets, and it aims to double that figure. The company offers clients a range of services from self-directed brokerage accounts via E*Trade to full-service financial advisors. Acquisitions, including buying E*Trade and stock plan administrator Solium, have given Morgan Stanley greater scale and more capabilities. The firm has devoted a lot of resources and time to integrating operations, said Finn.
With those tasks behind it, Morgan Stanley can focus on execution, he said.
“We are in a unique position in the industry,” he said. “We talk about it as a category of one. Of course we have competitors in individual business lines we compete in, but no one has all these capabilities under one roof.”
The self-directed brokerage and workplace businesses are providing referrals to Morgan Stanley’s thousands of financial advisors, Finn said. Last month, Morgan Stanley made 14,000 client referrals to advisors. That’s up from 2,000 in January 2022.
The company has also gotten better at identifying and converting potential wealth clients, he said. Top quartile advisors close one out of three leads Morgan Stanley sends them, he said. “Some advisors are closing 50%,” he said. “I almost didn’t believe it.” The firm is routing referrals more quickly to the right advisors, he said.
The referral pipeline should be a tailwind that benefits the company for years to come as full-service wealth management clients can be more profitable for Morgan Stanley and use more of the company’s services.
Finn also said that the migration toward fee-based financial advice and away from commissions is another tailwind for the firm as more customers, including self-directed clients, opt to move assets into managed relationships.
He also said that Morgan Stanley’s wealth unit is bringing in vastly more net new assets than it did a decade ago. And even though the industry faced headwinds last year, in part because of the high interest rate environment, Morgan Stanley still fared better than its competitors when it came to net new assets as a percentage of total assets, Finn said. The company brought in $282 billion in net new assets last year. It’s a figure few wealth managers come close to matching.
Morgan Stanley also has an opportunity to expand upon its existing services for clients, particularly banking and lending, Finn said. The company’s wealth management loans rose to $147 billion for 2023 from $80 billion for 2019,ut it still has low penetration relative to its competitors, according to Finn.
Though the firm has finished its integration work, it continues to make investments in technology, particularly artificial intelligence, which Morgan Stanley sees as a potential tool for helping advisors get the most out of the company’s capabilities and resources, Finn said.
Write to Andrew Welsch at andrew.welsch@barrons.com