Morgan Stanley’s Wealth Management Division Cannot Sustain Its Current Growth Trajectory For Long

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Morgan Stanley has done well over the years to successfully shift its business model from a trading-centric one to one that focuses considerably on wealth management. This has ensured relatively stable revenues for the bank while still allowing it to make the most of favorable capital market conditions. Notably, the banking giant has grown wealth management client assets by 5.6% annually since 2013 – much better than the 3.8% annual growth figure for market leader BofA-Merrill Lynch over the same period. And it has been able to achieve this while steadily reducing the number of wealth advisors on its payroll.

While the larger portfolio of client assets has driven the top line, falling advisor headcount has resulted in a smaller growth in operating expenses – resulting in wealth management margins improving from 18.5% in 2013 to 25.5% in 2017. But with Morgan Stanley’s client assets per advisor metric reaching the same level as BofA-Merrill Lynch, it might not be possible for the bank to grow any further without adding new advisors. The increase in operating expenses from the addition of new wealth advisors, coupled with the ongoing trend of a shift towards a fixed-rate fee structure for client accounts, will lead to profit margins stagnating in the future – and could potentially lead the margin figure lower. We detail the impact of changes in Morgan Stanley’s wealth management division on its share price in our interactive dashboard for the bank.

The chart below captures the change in total wealth advisors for the three largest U.S.-based wealth management firms:

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The figures above have been compiled from the annual reports of each of these banks, and shows the sizable increase in Bank of America’s advisor base over the last five years even as rivals Morgan Stanley and Wells Fargo steadily reduced the number of advisors. Despite this difference, these banks have seen sizable gains in the total size of client assets over the period thanks to net new cash added by advisors as well from upbeat market conditions that elevated security valuations. This helped the total client assets per advisor for the three banks to largely improve over this period, as detailed in the chart below.

Notably, Morgan Stanley has increased its client assets per advisor metric rapidly over the years from $116 million to $151 million by focusing on high net-worth individuals even as it reduced its advisor base. On the other hand, Bank of America’s client assets per advisor have largely remained around $155 million over this period – indicating that they are at a stable level, with the fluctuations from one year to the next being driven by changes in asset valuation.

Based on this, we believe that this metric should stabilize around $155-$160 million for Morgan Stanley in the long run – and the bank will likely need to grow its advisor base in the near future to ensure sustained growth in client assets. However, Morgan Stanley does not have the ability to cross-sell its wealth management services to the same extent as Bank of America due to the latter’s strong retail banking presence. To put things in perspective, the cross-selling advantage helped Bank of America report wealth management margins of almost 27% in 2017 despite the growing advisor base. This would mean that as Morgan Stanley aims for growth in its wealth management operations in the future, it will have to settle for a margin figure around 24% in the long run (as opposed to the 25.5% figure in 2017).

Details about how changes to Wealth Management revenues affect the share price of these banks can be found in our interactive model for Bank of America-Merrill Lynch | Morgan Stanley | Wells Fargo

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