Brokerage Revamp Rewards Banks -- WSJ

By FeaturesDow Jones Newswires

Morgan Stanley, Merrill results show strong fee income, defections leveling off

This article is being republished as part of our daily reproduction of articles that also appeared in the U.S. print edition of The Wall Street Journal (January 25, 2018).

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Wall Street's efforts to reinvent the traditional brokerage business are starting to pay off.

The latest financial results from Morgan Stanley and Merrill Lynch, showing strength in fee-based revenue and a plateau in broker defections, represent some of the early rewards of the strategic transformation these firms have undertaken in the years since the financial crisis.

Faced with chastened investors, stricter regulations and increased competition from cheap automated advisers and brokers-turned-independent advisers, these traditional brokerages have been trying to transform themselves into businesses that are more profitable, more attractive to younger investors and have a bigger share of clients' assets and debt.

"There's a misconception that these are old-school businesses," said Steven Chubak, an analyst at Nomura Instinet. "The reality is that these guys are investing in technology and changing their [businesses] so it's a higher quality...than the legacy brokerage business."

As part of their evolution, the traditional brokerage firms have revamped how they recruit and pay their ranks while working to recast stockbrokers as full-service financial advisers who can help with everything from investing to borrowing to saving for retirement.

The fourth-quarter results highlight the business transformations under way. At Morgan Stanley, 44% of client assets -- or $1.05 trillion -- now generate steady fees. That share has continued to climb as advisers usher clients into more-lucrative fee-based accounts, as opposed to brokerage accounts that pay trading commissions. In the fourth quarter, Morgan Stanley advisers put $20.9 billion into fee-based accounts, up 22% from a year earlier.

While flows into fee accounts at Merrill Lynch slipped from a year earlier, such accounts now represent 39%, or $1.08 trillion, of total client balances. Analysts say the share of firms' fee-generating assets will continue to grow, potentially making up the majority of client assets. Adding in the impact of rising markets and interest rates makes firms' assets on the fee side all the more profitable.

For the fee -- which at roughly 1% of assets is for some clients more expensive than paying per trade -- firms are pitching advisers charged with monitoring and consulting on clients' full financial picture, and these advisers are capturing more of clients' wealth. One way has been through lending: Merrill Lynch ended the year with record loan balances, and Morgan Stanley said loans to wealth-management clients continued a yearslong streak of double-digit increases.

"These businesses are attractive, big earners," Nomura's Mr. Chubak said.

Challenges remain, observers say, particularly from the competitive threat posed by booming independent advisory firms, "robo" advisers and discount brokerages that are attracting some Wall Street's advisers and clientele with more pay, cheaper prices and broader fiduciary care. Uncertainty surrounding the fiduciary rule, a new retirement-savings regulation requiring advisers handling retirement accounts to work in clients' best interest, is a wild card that is accelerating business shifts and could test the traditional brokerages over the long term.

At the same time, climbing markets have given Wall Street brokerages the room to try to reinvent themselves. Rising assets levels have made relatively higher advisory fees palatable to clients while generating bigger profits for firms to help finance investments in technology and adviser retention.

"Rising markets are hiding the fact that there are structural issues," said Gauthier Vincent, head of wealth management consulting at Deloitte. "The [traditional brokerage] model is fundamentally not adding enough value to the investor."

The firms' efforts to reinvent themselves rely on their ability to retain their current ranks, juice productivity and groom a new generation of financial advisers. Analysts and executives say brokerages are investing in training programs designed to develop homegrown advisers while eliminating costly bonuses firms had historically offered to lure experienced brokers, and their clients, from competitors.

Bank of America finance chief Paul Donofrio said 3% growth in adviser head count, to 17,000, during the fourth quarter was due to investments in the firm's training program. Late last year, the firm announced changes to its 2018 pay program that directed more money to the lower -- and usually younger -- tier of brokers.

There is "more focus on investing in current advisers to increase productivity and lower expenses through digitization," said Devin Ryan, an industry analyst and managing director at JMP Securities LLC. In doing so, he added, firms are squeezing more out of their advisers.

At Morgan Stanley, adviser head count held has held steady at about 16,000 over the past year. Analysts say this is in part because the firm has joined rivals in cutting back on recruiting and has been more effective at establishing a moat around its broker force. The firm in October pulled out of a 2004 industry pact known as the broker protocol, making it more difficult for its brokers to jump ship with their client rosters.

Scrapping recruitment bonuses also has helped boost Morgan Stanley's profitability, a benefit the firm expects to reap through next year. At the same time, big investments in technology have helped push adviser productivity -- the revenue each one generates -- up 11% in the fourth quarter from a year earlier to $1.12 million per representative. (Merrill's adviser productivity rose 6.7% during the quarter to $994,000.)

Meanwhile, Wall Street's biggest brokerages are trying to stretch beyond investment sellers into businesses that more closely resemble their biggest threats -- digital advice firms known as robo advisers and the independent firms that offer advisers higher pay and more autonomy.

Analysts say better technology is helping advisers grab a bigger share of existing clients' wallets, while freeing up time to take on more business. Some of these new services, such as Morgan Stanley's recently launched robo adviser, are meant to woo younger clients and children of existing customers. Merrill's more established robo offering, Merrill Edge Guided Investing, has been aggressively pitched to younger client prospects and those with smaller accounts.

"They're viewing relationships as more holistic," Mr. Chubak said. "That's where the sea change is."

Write to Lisa Beilfuss at

Corrections & Amplifications Paul Donofrio is the chief financial officer of Bank of America Corp. An earlier version of this article incorrectly referred to him as the CFO of Bank of America unit Merrill Lynch.

(END) Dow Jones Newswires

January 25, 2018 02:47 ET (07:47 GMT)

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