Wall Street Brokerages Boosted by Rise in Fee Accounts, Client Borrowing

By Lisa Beilfuss Features Dow Jones Newswires

Wall Street's biggest brokerages posted double-digit gains in third-quarter profit as clients continued to move money into fee-based accounts and take on more debt.

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Record revenue in Morgan Stanley's wealth-management business helped push earnings 24% higher to $665 million versus the year-ago period. In Bank of America's global wealth- and investment-management business, which includes Merrill Lynch, net income climbed 10% from a year earlier to $769 million.

A continuing shift to accounts that pay steady fees helped pushed revenue higher at both Morgan Stanley and Merrill Lynch during the quarter. From a year earlier, money put into fee-based accounts more than doubled at Merrill Lynch and grew by two-thirds at Morgan Stanley, with each crossing the $1 trillion mark for fee-based assets.

The rise in fee-based assets highlights a shift that has been playing out across the wealth-management industry in recent years. Firms are increasingly ushering clients' money into accounts that generate fees, which offer steadier and more-predictable revenue than commission-based accounts. The Labor Department's fiduciary rule, meant to ensure brokers act in clients' best interest, has accelerated the shift because commissions can run afoul of the regulation.

The shift has been a boon to the brokerages as higher client assets on the fee side mean a bigger benefit from rising markets and higher interest rates. It hasn't been limited to retirement accounts. Jonathan Pruzan, Morgan Stanley's chief financial officer, said a significant amount of account conversions during the latest quarter came from nonretirement accounts as clients are increasingly attracted to the higher level of service that comes with fee-generating accounts.

Glenn Schorr, a brokerage industry analyst at Evercore ISI, said firms' efforts to provide more services to wealth-management clients are also translating to more lending. Financial advisers can often lend cheaper and faster compared with banks, Mr. Schorr said. At the same time, the trend by Wall Street brokerages to sell billions of dollars in loans backed by stocks and bonds is a lucrative one that boosts revenue while helping with client retention.

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At Morgan Stanley, securities-based loans rose 25% from a year earlier to $39.4 billion and mortgages climbed 13% to $25.7 billion. "The lending side provides a lot of stickiness with relationships," Chief Executive James Gorman said Tuesday, adding that most of the firm's clients have more than $100,000 at Morgan Stanley. "It's a real competitive advantage now to be able to compete with the banks and offer these lending products," he said.

Bank of America's finance chief, Paul Donofrio, said structured lending helped drive third-quarter results in the company's wealth unit. At Merrill Lynch, client loan balances grew 8% in the third quarter to $154 billion. A spokesman for the firm said mortgage lending represents roughly two-thirds of that increase, while lending against clients' portfolios accounts for about a third of the growth.

Higher revenue from the shift toward more-lucrative fee-based accounts and continued lending growth -- together with rising markets and higher interest rates -- helped push margins higher at both Morgan Stanley and Merrill Lynch. Pretax profit margins were 26.5% and 27%, respectively, in Morgan Stanley's wealth unit and Merrill Lynch, up from 23.2% and 26% a year earlier.

"There's still a lot of momentum," said Devin Ryan, managing director and brokerage analyst at JMP Securities LLC. Rising fee assets are a particular tailwind, he said, potentially having an even bigger effect on the fourth quarter.

Write to Lisa Beilfuss at lisa.beilfuss@wsj.com

(END) Dow Jones Newswires

October 17, 2017 16:08 ET (20:08 GMT)