Ever since the great financial crisis, management at Morgan Stanley has laid out a vision to marry its fabled global investment bank to world-class wealth management and investment management businesses.
The aim is to reduce exposure to tail risks and draw more revenue and profit from low-capital consuming and stable fee-earning activities.
The first big push came in 2009 with the purchase from Citi of a majority stake in Smith Barney and its army of financial advisers. That led to a full takeover in 2012.
In 2020, the firm put on a second shove with two big strategic deals. In February, it announced the acquisition of E*Trade, an electronic brokerage that brings over 5.2 million self-directed customers. It completed that deal in October.
The firm then announced the acquisition of investment manager Eaton Vance, which adds another $500 billion of assets under management (AuM) to the $715 billion already at Morgan Stanley Investment Management (MSIM).
All told, Morgan Stanley will now oversee $4.4 trillion of AuM across its wealth management and investment management divisions.
These were well-flagged steps along a considered strategic path the company has carefully mapped out for investors and customers. That’s still a lot to take on in the middle of a pandemic, however.
Integrations
Chief financial officer Jonathan Pruzan, previously an investment banker who rose to co-head the financial institutions team at Morgan Stanley and has advised on many big bank mergers, says: “We considered that but believe we have the resources to successfully complete those integrations in two different businesses.
“I can tell you as the head of strategy that whenever we went through potential strategic partners, E*Trade and Eaton Vance were always at the top of the list. We don’t get to control the timing, though. Eaton Vance reached out to us.”
He sounds clear that this is a highlight in Morgan Stanley’s history. “Not many executive teams get to announce two major strategic deals in a single year.”
What do they bring?
Pruzan lays out some of the industrial logic.
Wealth management works through three channels. Financial advisers, as the name implies, typically provide advice and earn fees from wealthier individuals. Morgan Stanley is a leader in the US, competing with Bank of America Merrill Lynch. Electronic brokers provide a low-cost service typically – though not always – to less wealthy individuals doing their own trades. They supplement shrinking commissions with payment for order flow.
We still see opportunities to gain market share
Jonathan Pruzan, Morgan Stanley
In between, there are providers who manage investments with limited customer contact, perhaps through call centres.
“We find that the three channels are converging,” says Pruzan. “Some E*Trade customers who are wealthier are also clients of Morgan Stanley financial advisers. We also have Solium that manages corporate stock plans, which give us access to five million individual participants. That is a pool of potential clients for E*Trade and eventually for the financial advisers.
“In America, most people generate wealth through their work over time, and this acquisition gives us a younger demographic of growing wealth,” he explains. “A key synergy is that E*Trade might lose these clients as they grow wealthier over time and have more sophisticated needs. They can now feed instead into the FA channel.”
The story with Eaton Vance was slightly different.
“[Chief executive] James Gorman calls Eaton Vance a perfect fit, which gives MSIM both scale and new capabilities,” says Pruzan.
Over the years, Morgan Stanley Investment Management has often got lost to view in between a leading global investment bank and a top wealth manager. But it has grown strongly on its own in recent years, from $460 billion of AuM at the start of 2018 to $715 billion, thanks to strong performance and client inflows in high-conviction equity and alternatives.
“Eaton Vance brings complementary investment capabilities in ESG [environmental, social and governance criteria], parametrics and customized portfolios, and adds scale in fixed income and credit,” says Pruzan.
“There is almost no overlap. And these are also growth segments just like MSIM’s. What’s more, its distribution is mainly through wire houses in the US; while MSIM’s is mainly institutional and outside the US. There is a lot here that we can leverage.”
Strong performance
Away from the deal-making, the institutional securities group at Morgan Stanley, its investment bank, had a fabulous year, maintaining its leadership position in global equities, performing strongly in fixed income and in Asia, also with healthy underwriting revenues.
“We still see opportunities to gain market share,” says Pruzan.
And another signature business may be set to revive.
“In M&A we saw a five or six month hiatus, but activity was already picking up before the US election and the good vaccine news, two major risks that are now, in theory, resolved. The pace of announcements has accelerated dramatically.
“There has been some real underlying damage to the global economy. There are 20 million people out of work in the US and there are still bankruptcies to play out. Uncertainty remains. But you can either be paralyzed or you can act.
“Scale still matters. Some companies need to diversify. Important strategic activity cannot go on hold for long.”
Clearly not.
