Morgan Stanley Smith Barney took a hit in the second quarter that rattled numbers across its divisions, including the global wealth management side.
Net income at the global wealth management division rose to $225 million in the second quarter from $193 million in the first. Revenue, however, was $3.3 billion, a drop from $3.4 billion in the first quarter.
“Expense control is the reason net income increased while revenues declined,” a spokesperson at Morgan Stanley Smith Barney said.
In addition, transaction revenues suffered in light of the global economic picture. Income from commissions declined from $1.2 billion to $976 million, “primarily reflecting reduced commissions and fees from lower levels of client activity,” Morgan Stanley’s release stated.
James P. Gorman, chairman and chief executive officer of Morgan Stanley said in a statement: “In Global Wealth Management, we increased our pre-tax margin to 12 % in an environment marked by investor caution, and we integrated substantially all of our technology systems, which should bring additional value to our clients. We continue to be focused on taking the necessary steps to deliver strong returns for our shareholders.”
“High volatility, downward pressure and macro-markets are not a winning formula,” Greg Cherry, senior analyst with Aite Group’s wealth management practice, said in a telephone interview. “We’re seeing it here and we saw it in other firms as well.” Cherry blamed the less than stellar results on macro-economic events as well as company-focused problems, including the Facebook IPO brouhaha and a downgrade from Moody’s. All that took a toll on the firm and wealth management, which reported a lower headcount, reduced client assets and lower transactional revenues from lower client activity.
“Challenges were a difficult market environment with a low level of investment activity and ongoing integration activities,” a spokesperson at Morgan Stanley noted.
Even growth from the ultra-high-net-worth category slowed at the global wealth management unit. After jumping from $538 billion to $580 billion in the first quarter, it fell to $560 million in the second. Clients with assets in the $1 million to $10 million category did not bring in as much revenue either as assets fell from $735 billion to $704 billion.
The silver lining rested in clients with assets under $1 million who saw positive gains as high as 10% in revenue. That, however, was not enough to drive client overall numbers higher. Total client assets fell $37 billion to $1.707 trillion.
Another boost came from the fee-based side of the practice, which grew from $1.8 billion in the first quarter to $1.9 billion.
“Despite, obviously, the ups and downs in the markets, I think fee-based assets continue to tram up a bit. Those numbers continue to rise and will provide them with more controlled budget perspective in terms of what they’re going to see versus the commission side,” Cherry said.
The firm’s recruitment suffered as Morgan Stanley Smith Barney lost 259 advisors, dropping its total number down to 16,934. Compare that with a total of 17,987 advisors one year ago. According to Cherry, several major factors have contributed to that reduction, including natural turnover as new advisors leave, the breakaway broker trend of advisors, and succession planning for an aging advisor force. “It’s kind of a mixed bag in terms of what’s going on with those numbers,” he said.
As the firm’s advisory force shrank, annualized revenue per global representative also dropped from $787 million to $775 million. Assets per global representative were $101 million, which was consistent with the first quarter.
Cherry predicts that going forward, Morgan Stanley will look to grow out its wealth management group in order to provide a more controllable source of income. “I think they see in the global wealth management group an income stream that they can manage a little better,” Cherry said.
On June 1, 2012, the firm advised Citigroup Inc., its partner in the MSSB joint venture, of its intention to exercise its right to purchase an additional 14% of Morgan Stanley Smith Barney that it doesn’t already own.
Overall, the parent company, Morgan Stanley reported net income for the quarter ended June 30 of $536 million. It also reported net revenues in the second quarter of $7.0 billion, a drop from $9.2 billion one year ago.
Mason Braswell writes for On Wall Street.