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Morgan Stanley wealth unit won’t drop broker compensation grid: CEO

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If the Fed thinks Morgan Stanley’s wealth management unit will drop its financial advisor compensation grid, CEO James Gorman says the central bank’s got it all wrong.

In response to an analyst’s question after Morgan Stanley announced second-quarter earnings, Gorman called the idea “an assumption that frankly has never [been] borne out by history.”

“We've never had an instance where we've gone off grid,” he continued. “I've been running these businesses for over 20 years, and I've never taken financial advisors off grid, nor has anybody else in the industry, to my knowledge.”

Morgan Stanley’s wealth management revenue ticked up by 2% year-over-year in the second quarter to a record $4.41 billion, and its pretax net income of $1.24 billion also reached a new high. Gorman said its profit margin could even surge above the rate of 28.2% for the period.

During a Q&A session following the earnings release, an analyst asked whether there could be fallout from the Fed’s measurements of Morgan Stanley’s projected net revenue under a stress model. CFO Jonathan Pruzan cautioned that the firm won’t know more until next year, but Gorman dismissed any talk of potential impact to the grid.

The models seem to count non-interest expense as sticky even though advisor compensation comes from production, he said. The disparity either relates to compensation or “operating losses that are still bleeding through on the time series,” Gorman said.

“In plain English, we're still suffering from the deeds at this firm 10 years ago. And my attitude is we're a very, very different firm now,” he said, according to a transcript by Seeking Alpha. “It's something I am personally very focused on, and I'm glad we're starting to get a little bit under the kimono here, because this is 2019, not 2009.”

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The wealth unit’s after-tax income jumped 9% year-over-year to $953 million. In a note after the earnings release, analyst Brian Kleinhanzl of Keefe, Bruyette & Woods said that the division’s revenue had beaten the expected figure by nearly $250 million.

Head of Wealth Management Andy Saperstein has said the firm sees productivity, rather than headcount, as the best indicator of whether it’s implementing its vision. The firm added just one broker on a net basis year-over-year to reach 15,633 — also 75 fewer than the previous quarter.

On the other hand, annualized revenue per representative has increased 2% year-over-year to $1.1 million, and client assets per rep grew by 6% to $164 million. Client assets expanded by 7% from the year-ago period to $2.57 trillion, after nearly $10 billion in new fee-based flows.

The net new advisory assets fell by more than a third, which Pruzan attributed to retail investor caution around stock volatility. On May 1, Morgan Stanley closed the acquisition of Solium Capital, a stock-plan administration business the deal valued at roughly $900 million.

An analyst asked the firm if the share of fee-based assets as a percentage of total client assets had reached a plateau at the 45% level seen in the second quarter, as well as the sequential and year-ago period. The ratio won’t remain stagnant moving forward, Pruzan said.

“We do still believe that number will go higher and could clearly go toward 50% and beyond,” he said. As Morgan Stanley updates its offerings and aligns price to value, he added, the firm will see “more dollars flow into fee-based accounts than to brokerage accounts.”

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