NEW YORK (Reuters) - Morgan Stanley (MS.N) is so confident in the value of advising rich people that Chief Executive James Gorman said on Tuesday pretax profit margin in the bank’s Wealth Management business could rise as much as 25 percent this year.
The world’s largest retail brokerage firm, as measured by its more than 16,000 brokers, generated $736 million of pretax wealth management profit in the fourth quarter. Profit was up 3 percent from the comparable quarter of 2013 as brokers booked more fees from managing clients’ money and more interest from selling them loans.
But pretax profit margin, a key measure of income from ongoing businesses, fell to 19 percent of the wealth unit’s revenue for the fourth quarter from 21 percent in the third quarter.
Morgan Stanley brushed off the decline as a one-time event reflecting the accelerated payment of $88 million of bonus money to wealth executives in the quarter.
“Wealth Management continues to improve,” Gorman said on a conference call with analysts, forecasting that pretax margin in the business is “on a clear path” to hit 22 to 25 percent this year. Competitor Merrill Lynch, whose retail brokerage business was once led by Gorman, reported a 25 percent fourth-quarter pretax margin last week in its global wealth businesses.
Gorman, who bought Citigroup’s Smith Barney brokerage business, has bet more on the wealth business than competitors, reasoning that steady fees from the wealthy can offset the more erratic revenue from the bank’s trading and corporate advisory businesses.
Like Merrill and other competitors, Morgan Stanley is giving brokers incentives to focus on the wealthiest clients. Almost 78 percent of the $2.02 trillion of assets in Morgan Stanley wealth accounts at yearend 2014 were from clients with $1 million or more at the bank.
Morgan Stanley also said Thursday that clients sent $20.8 billion of new money into their fee-based (as opposed to commission-based) accounts from October through yearend, a quarterly record.
The new money came despite a 2 percent fall in the company’s population of brokers during 2014, a decline of 380 brokers to 16,076. Morgan Stanley’s branch network shrank by 27 offices to 622.
Assets per broker continue to rise, however, and company executives said profit margins could beat their targets this year if interest rates and equity markets rise. Their remarks came after Morgan Stanley said overall earnings did not beat analysts’ expectations.
Reporting by Jed Horowitz; Editing by Richard Chang