Trader Talk

Wall Street banks have found a great new way to make big money now that trading is down

Key Points
  • Morgan Stanley reported quarterly earnings that beat expectations, fueled by growth in its wealth management division.
  • Morgan Stanley now has roughly 16,000 wealth management reps with $2.2 trillion in client assets.
  • The business of wealth management is growing at plenty of other big banks, including Bank of America.
Digital display signs on the exterior of the headquarters of Morgan Stanley in New York's Times Square.
Mike Segar | Reuters

Forget trading. It's wealth management that is helping returns at many banks.

Psst — want to make some real money, without all the risks involved in trading and IPOs? Get into the wealth management business.

What's wealth management? It's the business of providing financial advice. It could be as simple as advising what stocks or bonds to own, but it could also extend to more complicated advice like accounting and tax services, as well as retirement and estate planning. The key is that it is usually fee-based, which means a recurring source of revenue for the adviser.

Look at Morgan Stanley, which reported this morning. Most people hear "Morgan Stanley" and they think trading. Stocks, bonds, and commodities trading, as well as investment banking. And it's true — that part of the business is still strong. But something else has been happening at Morgan Stanley and other firms over the last few years: Wealth management is getting bigger.

At Morgan Stanley, it's now nearly half of total revenues:

Morgan Stanley Revenues

Institutional securities: 49 percent
Wealth management: 43 percent
Investment management: 8 percent

And wealth management is growing faster than institutional securities (that's the trading and investment banking division), reporting record quarterly revenue and pre-tax profit results. It's up 9 percent this quarter compared to the same period last year, while institutional securities is up only 4 percent.

Why is this happening? Because Morgan Stanley is seeing the power of leveraging an army of financial advisers to collect huge amounts of assets under management and charge fees for managing those assets.

Morgan Stanley Wealth Management

Wealth management reps: 16,000
Total client assets: $2.2 trillion
Fee-based accounts: $962 billion

These are enormous numbers: 16,000 wealth management representatives with $2.2 trillion in client assets. Here's the important part: Almost $1 trillion of that ($962 billion) is in fee-based accounts. What does that mean? It means they can collect an annual fee of, say, 1 percent or so (depends on the accounts) just for keeping money with them.

It's a hell of a business! Any wonder that everyone is scrambling to manage more money, and that it's usually about assets under management and fees? It's part of a big move in the financial advice business, away from charging commissions for trading and toward fee-based management.

How did this happen? How did they get this army of managers? Part of it was organic. Morgan Stanley was founded in 1935 by, well, Morgan and Stanley (you knew that, right?). But more importantly, they have been an aggressive acquirer of businesses for many years, particularly after they bought Smith Barney from Citigroup at the height of the financial crisis in 2009.

How aggressive? On the conference call, CEO James Gorman noted, "Morgan Stanley is now a composite firm that includes Dean Witter Reynolds and Company, Robinson Humphrey, Legg Mason, Smith Barney, Shearson, Hutton and there are probably [others] that I'm missing."

He can't even remember them all, there have been so many!

Along the way, they have been criticized for some of those purchases. The Dean Witter deal in 1997 was particularly reviled internally, being viewed as a decidedly downscale purchase. One big producer at the time told me that the merger "was like Tiffany buying 7-Eleven."

But look who's laughing now. On the conference call, management crowed that the wealth management division had achieved a 25-percent pre-tax margin and a record profit before tax of over $1 billion. They also noted that in the first full year after it acquired Smith Barney, the wealth management division also made $1 billion.

In other words, they're saying they made as much in the last quarter as the whole division made in a year a few years ago.

Morgan Stanley's 44 percent of revenues coming from wealth management is a high number, but that figure is growing at other big banks as well.

Wealth Management at Big Banks
(as a percentage of revenues)

Bank of America: 21 percent
Comerica: 14 percent
JP Morgan Chase: 12 percent
Regions Financial: 11 percent
Fifth Third: 9 percent

This is all happening despite downward pressure on fees from investors flocking to ETFs. But there's a counter-trend: Wealthier people are willing to pay to have access to what's perceived to be high-level advice. And the banks are figuring out ways to monetize that need.