Wall Street Brokerages Boosted by Rise in Fee Accounts, Client Borrowing
October 17 2017 - 4:23PM
Dow Jones News
By Lisa Beilfuss
Wall Street's biggest brokerages posted double-digit gains in
third-quarter profit as clients continued to move money into
fee-based accounts and take on more debt.
Record revenue in Morgan Stanley's wealth-management business
helped push earnings 24% higher to $665 million versus the year-ago
period. In Bank of America's global wealth- and
investment-management business, which includes Merrill Lynch, net
income climbed 10% from a year earlier to $769 million.
A continuing shift to accounts that pay steady fees helped
pushed revenue higher at both Morgan Stanley and Merrill Lynch
during the quarter. From a year earlier, money put into fee-based
accounts more than doubled at Merrill Lynch and grew by two-thirds
at Morgan Stanley, with each crossing the $1 trillion mark for
fee-based assets.
The rise in fee-based assets highlights a shift that has been
playing out across the wealth-management industry in recent years.
Firms are increasingly ushering clients' money into accounts that
generate fees, which offer steadier and more-predictable revenue
than commission-based accounts. The Labor Department's fiduciary
rule, meant to ensure brokers act in clients' best interest, has
accelerated the shift because commissions can run afoul of the
regulation.
The shift has been a boon to the brokerages as higher client
assets on the fee side mean a bigger benefit from rising markets
and higher interest rates. It hasn't been limited to retirement
accounts. Jonathan Pruzan, Morgan Stanley's chief financial
officer, said a significant amount of account conversions during
the latest quarter came from nonretirement accounts as clients are
increasingly attracted to the higher level of service that comes
with fee-generating accounts.
Glenn Schorr, a brokerage industry analyst at Evercore ISI, said
firms' efforts to provide more services to wealth-management
clients are also translating to more lending. Financial advisers
can often lend cheaper and faster compared with banks, Mr. Schorr
said. At the same time, the trend by Wall Street brokerages to sell
billions of dollars in loans backed by stocks and bonds is a
lucrative one that boosts revenue while helping with client
retention.
At Morgan Stanley, securities-based loans rose 25% from a year
earlier to $39.4 billion and mortgages climbed 13% to $25.7
billion. "The lending side provides a lot of stickiness with
relationships," Chief Executive James Gorman said Tuesday, adding
that most of the firm's clients have more than $100,000 at Morgan
Stanley. "It's a real competitive advantage now to be able to
compete with the banks and offer these lending products," he
said.
Bank of America's finance chief, Paul Donofrio, said structured
lending helped drive third-quarter results in the company's wealth
unit. At Merrill Lynch, client loan balances grew 8% in the third
quarter to $154 billion. A spokesman for the firm said mortgage
lending represents roughly two-thirds of that increase, while
lending against clients' portfolios accounts for about a third of
the growth.
Higher revenue from the shift toward more-lucrative fee-based
accounts and continued lending growth -- together with rising
markets and higher interest rates -- helped push margins higher at
both Morgan Stanley and Merrill Lynch. Pretax profit margins were
26.5% and 27%, respectively, in Morgan Stanley's wealth unit and
Merrill Lynch, up from 23.2% and 26% a year earlier.
"There's still a lot of momentum," said Devin Ryan, managing
director and brokerage analyst at JMP Securities LLC. Rising fee
assets are a particular tailwind, he said, potentially having an
even bigger effect on the fourth quarter.
Write to Lisa Beilfuss at lisa.beilfuss@wsj.com
(END) Dow Jones Newswires
October 17, 2017 16:08 ET (20:08 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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