After the big strategic acquisitions of 2020, when Morgan Stanley spent $13 billion on E*Trade to add a new self-directed channel to wealth management and then $7 billion on Eaton Vance to bring greater fixed-income capabilities to investment management, the firm’s older businesses shone in 2021.
In the first nine months of the year, investment banking revenues were 60% higher than the same period in 2020, while advisory revenues more than doubled.
“All the debt and equity that companies raised last year was looking for growth in a period of greater stability, and that set up a tremendous year in M&A,” says Sharon Yeshaya, chief financial officer of Morgan Stanley.
“Our firm’s original DNA was M&A, and it is at the core of our integrated investment bank. M&A leads to greater capital markets activity, which in turn leads to higher volumes in sales and trading. The overall fee pool grew, and Morgan Stanley’s share of the pool also increased.”
The firm hired as M&A expanded beyond the mainstay sectors of healthcare and technology that have dominated volumes in recent years, and where Morgan Stanley is an acknowledged leader.
“We needed more boots on the ground, and we continue to see growth and opportunity to invest in the M&A product,” says Yeshaya. “But we have been very disciplined in self-funding investments and in managing balance-sheet velocity, and that has led to strong operating leverage.”
Return on average tangible common equity in the firm’s Institutional Securities Group, which combines the equity and fixed-income sales and trading businesses with investment banking, hit 20% over the first three quarters of 2021, up from 14% in 2020.
Our firm’s original DNA was M&A, and it is at the core of our integrated investment bank
Sharon Yeshaya
But wealth management is now much bigger and boasts even higher returns. Chief executive James Gorman set out after the financial crisis to build it, together with investment management, into the ballast that would stabilize the firm’s more volatile investment banking and markets earnings.
Now the ballast is the growth story.
Together, wealth management and investment management brought in $400 billion of net new client assets in the first nine months of 2021.
“That is a remarkable number,” Yeshaya says. “It shows that we have all the channels in wealth management and many more touch points to engage with the firm. And it supports the migration from transaction-based to fee-based accounts.”
