Wall Street’s efforts to reinvent the traditional brokerage business are
starting to pay off.
The latest financial results from Morgan Stanley and Bank of America Corp.'s 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.”
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