MS Morgan Stanley

By Michael Wursthorn 

Morgan Stanley's wealth-management arm posted record quarterly revenue, buoyed not by traditional brokerage activities but rather by banking activities that underscore how big brokerages now lean on brokers to collect deposits and push loans.

The New York bank said Wednesday that its wealth unit posted $3.88 billion in third-quarter revenue, up 6.6% from the year-earlier period. Brokers were able to get more clients to deposit their money with Morgan Stanley and take out loans, pushing the wealth unit's net interest income, or the difference between interest earned and interest paid, up 18% to $885 million from last year.

That helped offset a 2% decrease in asset-management fees, which fell to $2.13 billion for the quarter due to a decline in the fees it collects off of advisory accounts. Transactional revenue, which includes commissions, was also up, but mostly because of investment gains related to certain employee-deferred compensation plans, the bank said.

"I don't think I've seen transaction levels lower than this," Chief Executive James Gorman told analysts on a conference call. "The fact the [wealth] business had record revenue is a testament to the managed-money side of it, the banking side of it, the deposit side of it -- things that frankly 15 years ago didn't exist."

Since the financial crisis, Mr. Gorman has put the brokerage business at the bank's fore, favoring the steady revenue it generates over harder-to-predict trading and investment-banking activities. Morgan Stanley's initial step toward transforming itself was in 2009, when it picked up thousands of brokers through its acquisition of Citigroup Inc.'s Smith Barney brokerage unit.

More recently, Mr. Gorman has turned his attention to boosting the wealth-management unit's banking capabilities, an area in which it lags behind rivals such as Bank of America Corp.'s Merrill Lynch. Morgan Stanley started offering clients incentives to get them to move more cash to their brokerage accounts, including fee rebates for using automated-teller machines and free identity-theft protection.

Morgan Stanley has also been trying to motivate its brokers to help build up its bank, including offering bonuses of up to $202,500 for getting clients to take out debt such as loans backed by investment portfolios.

Deposits at Morgan Stanley have grown 7% from last year to $149 billion, while client loans surged 15% to $70 billion as of Sept. 30.

By comparison, Bank of America's global wealth unit, which includes Merrill, for instance had $141.2 billion of total loans on its balance sheet as of the end of the third quarter, while deposits totaled $253.8 billion.

Morgan Stanley's approach to expanding its banking operations has drawn scrutiny. Earlier this month, Massachusetts' top securities regulator alleged in a complaint that Morgan Stanley offices in Massachusetts and Rhode Island ran an internal sales contest that gave brokers as much as $5,000 for signing up new securities-backed loans in 2014, while playing down risks associated with the products.

Morgan Stanley has objected to the allegations and said clients consented to the loans after discussing the products with brokers.

When asked about the complaint by an analyst, Mr. Gorman said it won't force the bank to change its approach and declined to comment further on the matter.

Despite Morgan Stanley's shift in focus, a trading rebound contributed to a 57% jump in quarterly earnings.

Morgan Stanley hasn't disclosed detailed plans yet on how its brokerage arm plans to comply with sweeping new rules on retirement accounts that will hold brokers to a so-called fiduciary standard, but Mr. Gorman said more information would be forthcoming in the next few weeks.

Merrill Lynch is the only major U.S. brokerage to reveal how it plans to comply with the rule, which require brokers to put the interests of retirement savers first. Earlier this month, it said it would abandon individual retirement accounts that charge commissions.

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com

(END) Dow Jones Newswires

October 19, 2016 12:32 ET (16:32 GMT)

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