The wealth management industry has hit its stride in the post-financial crisis era. But to keep the bottom line growing, wealth management firms need to prepare for coming challenges and opportunities.
Greg Fleming, president of Morgan Stanley Wealth Management, explains how his firm is adapting to the evolving needs and digital expectations of wealthy clients, and preparing to meet the challenge posed by robo advisors.
As long as the firm offers a digital experience on par with, if not better than, any firm, Morgan's advisors won't be disintermediated, Fleming says.
This interview is part of our special report on the state of wealth management
Whats the industrys biggest challenge?
When you stand back and take a look at the industry today, its in a strong position, particularly given the market environment over the past few decades. You had the tech bubble popping at the end of the last century, the events of Sept. 11, the building and then popping of the credit bubble in 07 and 08, and an equity market that was roughly flat from 2000 through today. When you put all that together, its been quite a period of volatility. Its been a wrenching market that all of us have lived through over the last 20 years. Given all that, I think the industry sits in a very good position today.
Part of the reason is that clients recognize the importance of advice. As long as financial advisors are offering high-quality advice across the full breadth of what a client is looking for, and they do that well, their practices will continue to thrive.
What role do you see robo advisors playing?
Technology and a digital strategy are very important. But for most clients, particularly clients with a significant amount of wealth, advice and having a financial advisor are very important today and will be as far as the eye can see.
That doesnt mean we wont offer a great digital experience, but we think the financial advisor will not be disintermediated. We think youre going to want a advisor to maintain your financial wealth.
We [also] recognize the importance of digital. Were reflecting that in our business and were investing in it because we want our clients to have as good a digital experience as at any other firm. Frankly, we were somewhat behind on this because we were busy integrating the two businesses.
If I bring us full circle, I was arguing for the primacy of financial advisor in the form of a human being. We believe in that. But we also believe our financial advisors and clients need to be supported by best-in-class technology. And we believe that our clients are going to expect to interface with us in as efficient a manner as is possible anywhere, from accessing account information or doing something as simple as depositing checks to the entire mobile experience of the client.
While the robo advisors will make some gains, were comfortable with our position with the advisor front and center, and as long as we offer as good a digital experience as any in the industry, our advisors wont be disintermediated.
How are demographic changes affecting the business?
One of our big focuses at Morgan Stanley Wealth Management is running a business that reflects the clients we serve. Were very focused on increasing the number of advisors we have that are women.
We dont believe that women, as some surveys suggest, are going to insist on having a female financial advisor. But we do believe that women clients, who are going to be an increasing number of our clients and everyone elses, will want to work with a firm that has a great many options for them to work with, male and female. And they will want to work with a firm that is cognizant of the changing world. We are very focused on increasing the number of female advisors we have and increasing the ranks of female managers to reflect the role women are playing.
Given the number and quality of women we can bring into the organization, and given that women make good financial advisors, were going to make a difference over the next five years. Our business will evolve to reflect the society were working in. But part of that for me and the leadership team is making it clear that this is a priority.
Have the needs of HNW clients become more complex?
Yes. And that is part of the reason advice will remain front and center. Youre starting with the basics, asset allocation and things like that, but youre adding an increasingly complex set of products trust and estate planning, how to bring the children in and making sure you understand how they want to talk about money. Our advisors are getting trained on how to talk about topics like that. Clients are looking for input on cross-generational matters.
CEO James Gorman said he wants to lower broker compensation relative to revenue, from 60% to 55%. How will the firm do that?
A couple of ways. As we grow our banking and lending capabilities, those revenues are not compensated in the traditional way of being paid through a compensation grid. There is some scale you get in the ratio in growing that business. And relative to our major competitors who are all bank-owned, our banking and lending business is smaller. Weve been building it over the past few years. So simply taking net interest income up to levels closer to the industry standard, which we are on a nice trajectory to do, will take the compensation ratio down. Thats the single biggest driver of what James was talking about.
The other thing he was saying was that as the business becomes larger, there are some functions that do not need to increase, including support functions for advisors. So that pushes the ratio down.
What he wasnt doing was making a dramatic statement about broker compensation. And youve heard me wax eloquently on the importance of the financial advisor model today and going forward. We are clear and consistent on that.
Whats your future vision for the firm?
Weve taken our pretax margins from the 2011 timeframe from about 10% to north of 20%. As we continue to grow our business on both sides of the balance sheet, assets and liabilities, we think we can continue to move these margins going forward benefitting not only shareholders but advisors and clients, because it enables us to run our business and grow our business. The margin targets we have out there are currently 22-25% by the end of next year.
- Profits Jump 17% at Morgan Stanley Wealth Management
- FINRA Names New Arbitration Head
- What Ultra-Wealthy Clients Really Need