By Lisa Beilfuss
Wall Street's efforts to reinvent the traditional brokerage
business are starting to pay off.
The latest financial results from Morgan Stanley and Merrill
Lynch, showing strength in fee-based revenue and a plateau in
broker defections, represent some of the early rewards of the
strategic transformation these firms have undertaken in the years
since the financial crisis.
Faced with chastened investors, stricter regulations and
increased competition from cheap automated advisers and
brokers-turned-independent advisers, these traditional brokerages
have been trying to transform themselves into businesses that are
more profitable, more attractive to younger investors and have a
bigger share of clients' assets and debt.
"There's a misconception that these are old-school businesses,"
said Steven Chubak, an analyst at Nomura Instinet. "The reality is
that these guys are investing in technology and changing their
[businesses] so it's a higher quality...than the legacy brokerage
business."
As part of their evolution, the traditional brokerage firms have
revamped how they recruit and pay their ranks while working to
recast stockbrokers as full-service financial advisers who can help
with everything from investing to borrowing to saving for
retirement.
The fourth-quarter results highlight the business
transformations under way. At Morgan Stanley, 44% of client assets
-- or $1.05 trillion -- now generate steady fees. That share has
continued to climb as advisers usher clients into more-lucrative
fee-based accounts, as opposed to brokerage accounts that pay
trading commissions. In the fourth quarter, Morgan Stanley advisers
put $20.9 billion into fee-based accounts, up 22% from a year
earlier.
While flows into fee accounts at Merrill Lynch slipped from a
year earlier, such accounts now represent 39%, or $1.08 trillion,
of total client balances. Analysts say the share of firms'
fee-generating assets will continue to grow, potentially making up
the majority of client assets. Adding in the impact of rising
markets and interest rates makes firms' assets on the fee side all
the more profitable.
For the fee -- which at roughly 1% of assets is for some clients
more expensive than paying per trade -- firms are pitching advisers
charged with monitoring and consulting on clients' full financial
picture, and these advisers are capturing more of clients' wealth.
One way has been through lending: Merrill Lynch ended the year with
record loan balances, and Morgan Stanley said loans to
wealth-management clients continued a yearslong streak of
double-digit increases.
"These businesses are attractive, big earners," Nomura's Mr.
Chubak said.
Challenges remain, observers say, particularly from the
competitive threat posed by booming independent advisory firms,
"robo" advisers and discount brokerages that are attracting some
Wall Street's advisers and clientele with more pay, cheaper prices
and broader fiduciary care. Uncertainty surrounding the fiduciary
rule, a new retirement-savings regulation requiring advisers
handling retirement accounts to work in clients' best interest, is
a wild card that is accelerating business shifts and could test the
traditional brokerages over the long term.
At the same time, climbing markets have given Wall Street
brokerages the room to try to reinvent themselves. Rising assets
levels have made relatively higher advisory fees palatable to
clients while generating bigger profits for firms to help finance
investments in technology and adviser retention.
"Rising markets are hiding the fact that there are structural
issues," said Gauthier Vincent, head of wealth management
consulting at Deloitte. "The [traditional brokerage] model is
fundamentally not adding enough value to the investor."
The firms' efforts to reinvent themselves rely on their ability
to retain their current ranks, juice productivity and groom a new
generation of financial advisers. Analysts and executives say
brokerages are investing in training programs designed to develop
homegrown advisers while eliminating costly bonuses firms had
historically offered to lure experienced brokers, and their
clients, from competitors.
Merrill Lynch finance chief Paul Donofrio said 3% growth in
adviser head count, to 17,000, during the fourth quarter was due to
investments in the firm's training program. Late last year, the
firm announced changes to its 2018 pay program that directed more
money to the lower -- and usually younger -- tier of brokers.
There is "more focus on investing in current advisers to
increase productivity and lower expenses through digitization,"
said Devin Ryan, an industry analyst and managing director at JMP
Securities LLC. In doing so, he added, firms are squeezing more out
of their advisers.
At Morgan Stanley, adviser head count held has held steady at
about 16,000 over the past year. Analysts say this is in part
because the firm has joined rivals in cutting back on recruiting
and has been more effective at establishing a moat around its
broker force. The firm in October pulled out of a 2004 industry
pact known as the broker protocol, making it more difficult for its
brokers to jump ship with their client rosters.
Scrapping recruitment bonuses also has helped boost Morgan
Stanley's profitability, a benefit the firm expects to reap through
next year. At the same time, big investments in technology have
helped push adviser productivity -- the revenue each one generates
-- up 11% in the fourth quarter from a year earlier to $1.12
million per representative. (Merrill's adviser productivity rose
6.7% during the quarter to $994,000.)
Meanwhile, Wall Street's biggest brokerages are trying to
stretch beyond investment sellers into businesses that more closely
resemble their biggest threats -- digital advice firms known as
robo advisers and the independent firms that offer advisers higher
pay and more autonomy.
Analysts say better technology is helping advisers grab a bigger
share of existing clients' wallets, while freeing up time to take
on more business. Some of these new services, such as Morgan
Stanley's recently launched robo adviser, are meant to woo younger
clients and children of existing customers. Merrill's more
established robo offering, Merrill Edge Guided Investing, has been
aggressively pitched to younger client prospects and those with
smaller accounts.
"They're viewing relationships as more holistic," Mr. Chubak
said. "That's where the sea change is."
Write to Lisa Beilfuss at lisa.beilfuss@wsj.com
(END) Dow Jones Newswires
January 24, 2018 08:14 ET (13:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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