Last year, Morgan Stanley had almost $60 billion in net fee-based inflows taking assets to more than $2 trillion. Pre-tax profit margin for the year for wealth management was 20%, in line with promises made by group CEO James Gorman when he bought the Smith Barney business from Citi. It is also up from 10% in 2011, the year Greg Fleming took on his current role as president of wealth management.
Gorman is now setting his sights on a 22% to 25% pre-tax profit margin by the end of 2015, according to the firm's earnings' presentation this week. The US firm has been transformed. Wealth management is now by far the largest revenue contributor to the group compared with five years ago, when it was the third-largest behind fixed income, and equity sales and trading.
Like rival Goldman Sachs, the firm has been pushed into lending. Says Fleming: “We are making a major push in lending client deposits back in loans and mortgages. Our loan balance is up over $50 billion – double that of year-end 2012.”
Lending is a natural part of wealth management, says Fleming. “The cash positions in asset allocation are very predictable as clients are not using them for traditional purposes – so if they shift their equity allocation from 80% to 70%, they end up just holding cash," he says.
"Given we are one of the 10 largest banks in the US, the question is what do we do with those deposits? Clients may turn to a competitor, so we built the capabilities to compete and use the deposits.”
Morgan Stanley's wealth management business deposits rose 23% last year to $128 billion.
Lending is an obvious step for advisors, says Fleming, adding: “We have a strong relationship on the asset side in terms of advice and products, but clients had to go elsewhere for their loans. We were being disintermediated through the liability side by some of our competitors, who provide both.”
Two-thirds of the firm’s financial advisers deploy the bank’s lending and banking products with clients.
Fleming says the focus of competitive advantage in wealth management is now technology. "As the millennials start to come through, history will matter less and less, and technology will matter more and more. As a generation, they do not function in the same way to older clients. They are known for opting for less physical interaction, and suppliers of wealth management will need to respond to the different demand patterns.”
Morgan Stanley Wealth Management reduced the number of retail locations last year by 4% to 622.
It’s not just the clients that will be millennials – it is their advisers, too, points out Fleming. “By 2030, half of the world’s workforce will be millennials," he says. "So it’s imperative to be as forward leaning as any start-up firm to attract talent as well as clients.”