Morgan Stanley's rich clients may have gotten surprised by their tax bills this year.
The bank's wealth management business was hit by an unexpectedly high outflow of deposits in the second quarter, which covers the April tax filing season, according to Chief Financial Officer Jonathan Pruzan.
Morgan Stanley had "greater-than-expected deposit outflows due in part to tax payments," Pruzan told analysts during a Thursday call. "We saw about $10 billion of outflows in the bank deposit program, some from larger tax payments."
Rich clients liquidate some investments every year to cover their tax bill, so presumably this was higher than what Morgan Stanley has seen in previous years. The likely culprit: Under the Trump administration's 2017 tax reform, the deduction for state income, sales and property taxes was capped at $10,000. That has widely been perceived as causing higher taxes for people living in New York, New Jersey and California, states that happen to have high property taxes and a disproportionate share of wealthy Americans.
"Some of these individuals have homes with $50,000 or $100,000 in tax bills for one home, and they have multiple homes, so they owed much more in taxes," said John Straus, managing partner at investment adviser Private Wealth Partners in Connecticut, another high-tax state. "People were most definitely surprised at the impact of the new tax bill."
High-net worth clients are typically worth $15 million to $25 million, said Straus, a veteran of the wealth management industry who has run businesses at Morgan Stanley, J.P. Morgan and UBS.
The mention of taxes came up during Morgan Stanley's second-quarter earnings call, when analysts probed executives on the impact of looming interest rate cuts on the business.
While the New York-based bank saw U.S. deposits shrink by $3.3 billion in the quarter to $175.8 billion, overall it was a strong showing for the firm's wealth management business: It posted record results that helped the company beat analysts' estimates for profit.