Battling to be a growth play
Morgan Stanley is changing. Long known as a leading global investment bank, the firm today produces half of its revenues from managing $2.6 trillion of investments and savings for wealthy American individuals and another $500 billion for institutional investors.
When Euromoney speaks to chief financial officer Jonathan Pruzan in December, the firm has, for the first time, enjoyed three consecutive quarters with $10 billion of revenues. It hit the $10 billion mark in the first two quarters of 2018, but revenues then fell back in the second half of that year.
And the previous time it pulled in that amount was in the first half of 2007 – an era that now seems hard to imagine and which did not end happily.
A long-term plan is playing out.
“Ten years ago, our pre-tax margin in wealth management was 6% and people thought we would never get it above 10%,” Pruzan tells Euromoney. “When we did so in 2011, they said we would never pass 15%; when we went past that in 2013, they said we’d never get to 20%, which we did two years later.”
To be fair to the doubters, they did include one James Gorman, chairman and chief executive of Morgan Stanley and the visionary driver of its big push into wealth management.
“I never imagined they [margins] could go beyond 20%,” he told Euromoney in February last year.
“Today the margin is at 27%,” says Pruzan “and growth is embedded because the growth rate of the wealth of our higher-end customers, with $10 million or more, is above that of less wealthy individuals.”
Morgan Stanley has improved margins in wealth management even while investing in digital, unifying underlying technology platforms and making acquisitions to capture further growth that may dilute short-term earnings but pay out over three to five years.
At the start of 2019 it bought Solium, an administrator of employee stock ownership plans, for $900 million. Now operating on Morgan Stanley’s Shareworks platform, this administers stock-based compensation for 2.7 million employees of companies ranging from the likes of General Motors to smaller public companies enjoying higher growth and even private companies that may eventually look to IPO.
“It also allows those companies to offer their employees some of the other resources of the Morgan Stanley wealth management franchise,” says Pruzan. “At a basic level, it might inform employees that their stock is about to vest and offer them the option to leave the resulting cash in a Morgan Stanley savings account.
"We can also offer employees financial wellness, perhaps robo-advisory or other digital channels. We don’t expect all of those individuals to become clients of Morgan Stanley and certainly not all to be clients of our financial advisers, but it is an efficient way to reach a lot of people and we have something to offer all of them.”
As it builds bank-like liabilities, so Morgan Stanley is also lending more. The firm has sufficient scale and product range in wealth management now that each incremental dollar of revenue comes on at a higher margin. It has learned that a good way to deepen relationships with clients and manage more of their wealth is to lend them money.
“Loan balances are going up,” says Pruzan.
This is not a temporary shift. Gorman told Euromoney in June: “Banking is moving from an opportunity to a growth business for us. It’s a good, stable business in which we can generate returns in excess of our cost of capital.”
Pruzan adds: “In the institutional securities group, we would like to continue to grow both assets and liabilities. We have lending commitments around events such as M&A situations and we particularly like secured lending. We have, for example, been very active lending to buyers of bank loans, such as the credit specialists acquiring NPL [non-performing loan] portfolios from European banks.”
Wealth management is an entirely US operation, following the classic American model for financial advisory. In an already consolidated domestic market, Morgan Stanley hopes it can grow volume and expand margin.
In global investment banking, the fee pool is not growing and neither are returns on capital. But Morgan Stanley hopes to continue to gain market share.
By contrast, the institutional asset management business remains highly fragmented. The firm has just passed $500 billion under management, far below the industry leaders, but most of that is higher margin business under active management, particularly in alternatives, such as private equity and private credit, and high conviction public equities.
“We’d like to continue to add to our scale and our capabilities through organic and inorganic growth,” says Pruzan. “For example, we don’t have scale in fixed income investment management, and we would like to achieve that.”