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April 18, 2013 9:18 pm
The early years of any marriage can be tough. Ask Morgan Stanley. Combining its wealth management arm with Smith Barney’s retail brokerage got off to a rocky start, delayed by problems integrating technology platforms. Happily, three years on, that appears to be in the past. Wealth management, which accounts for about 40 per cent of net revenue, was the bright spot in the bank’s first-quarter results. Total client assets hit $1.8tn, up 6 per cent from year end 2012. The pre-tax margin was 17 per cent – steady with the fourth quarter and approaching Morgan Stanley’s long-term target.
Wealth management generally does well when markets do (recent declines aside, the S&P 500 hit an all time-high on April 11, just after the end of the first quarter.) Rallies increase assets and asset-based fees through appreciation, new money and more trading. If the rally has legs, and wealth management is officially past its post-crisis gloom, buying Smith Barney looks, in retrospect, like a wise move. One challenge will be keeping costs down while retaining star brokers. Compensation was 60 per cent of net revenue in the quarter, down a percentage point year over year. Another is protecting share against discount brokers such as Schwab.
Morgan Stanley’s investment banking and trading business had a weaker quarter. Net revenues from fixed income and commodities sales and trading, in particular, dropped 42 per cent. Declines came across Wall Street, but Morgan Stanley – a smaller player in fixed income – fared worse than rivals. New regulations have raised costs. Morgan Stanley is reducing risk-weighted assets and pruning its business, but not withdrawing outright from any areas. The tough quarter could prompt calls for more drastic measures. Now that wealth management appears on a better footing, chief executive James Gorman can focus on the future of fixed income.
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