Morgan Stanley (MS) Earnings Call Transcript & Summary

Like off the charts, right? I mean the self-directed platform has performed extraordinarily well. With the closing of E*TRADE in October, we disclosed a bunch of new metrics for us in the fourth quarter. The trading activity or the daily average trades were 1.1 million in the fourth quarter. Year-to-date, they're over 50% higher than that. We've had a bunch of days over 2 million trades a day. So retail activity, retail engagement levels on that platform are extraordinarily high. New accounts year-to-date, in 2021, we now have opened more new accounts on that platform than we did in all of the third and fourth quarter combined. So more clients, more engagement, more activity, more cash. So just really, it's been off the charts.

Are you seeing any differences in risk appetite and activity levels by channel? I mean, obviously, you're telling this self-directed is off the charts. But the risk appetite by channel, does it differ?

Well, I mean the offering is clearly different, right? I mean the self-directed channel is primarily in equities -- I mean there are other products, but there's massive focus on equities and trading equities, right? You have more balanced portfolio, asset allocation, so I think the risk profile is a little bit different just based on the activity levels. That doesn't mean a self-directed client doesn't have a managed account somewhere else. But for this channel, it's mostly in equities -- it's mostly an equity-driven phenomenon.

Okay. Fair enough. So if I ask this delicately enough, in terms of your perspective on recent retail events and the implications for your business?

Well, I guess I would sort of bucket it into 2 buckets. One is just the level of retail engagement just across the world. And whether that's because of the current dynamics of where people are working, it just seems like a lot of people have more time to work on their financial position and situation. And whether that evolves when people start to go back to work, we'll have to see. But right now, it's actually the retail engagement is at levels that we haven't seen before. So that's bucket number one, and we'll have to see how that plays out, whether that persists when people go back to work. Bucket number two 2 is just a regulatory question. And we've seen lots of agencies over the past look into market structure, look into payment for order flow and all the things that you've been reading about. And the regulators will reexamine that again. And whether they make any recommendations or changes to that, it won't have a material impact on Morgan Stanley. I don't know what those would be. I certainly don't want to get in front of any of that discovery. But whatever the outcome is, we're going to be well positioned to deal with whatever recommendations come out. So we'll have to see how that plays out over the next couple of quarters.

Okay. So let's focus on the third channel within Wealth, which is workplace. And maybe the best place to start is the acquisition you did 2 years ago coming into this conference with Solium. So let's talk about the integration of Solium into Morgan Stanley, realizing the value of that acquisition for what it was and then kind of take it into considering what's an even bigger opportunity now with E*TRADE.

Sure. And I mean -- so this is the part of the presentation we'll talk about the workplace. I mean just -- I mean the opportunity in the workplace is just huge. I mean, as we know, in the U.S., most people generate their wealth through the workplace. So this is a huge long-term opportunity for us. The Solium deal that we did a couple of years ago really positioned us and set us up very, very nicely for that part of the business with E*TRADE. So that's just an incremental positive. We like this sector, we like this space, and we now have significant capability. So as a mechanical answer, we started down the path, as you know, we didn't really have what we call companion accounts. We had a different account structure for our stock plan business and the Shareworks platform. What we wanted to do was get everyone on the platform and get everyone a companion account. At this point, we have a little less than -- a little fewer than about 5 million participants, so the employees of the corporate plans. And about between now the Shareworks platform and the Equity Edge platform, we have about 50% of those clients -- or those participants have companion accounts. I think the next 30% or 40%, so to get us almost to 90% companion account, should take us probably about 18 to 20 months, and we'll see a real acceleration of that in 2022. So again, we're going to get the companion account to all the clients of the corporate accounts in very, very good shape by, again, within 18 to 20 months. So that's just a mechanical question -- mechanical answer. The opportunity is just increase the number of corporate relationships we have, so corporate wins, develop relationships and build trust with the employees or the participants of those corporates. And that's through content, that's through education, that's through services, and then convert those participants into clients of Morgan Stanley Wealth. And whether that's someone who just wants to put cash with us, whether that's someone who wants to have a self-directed account, whether that's someone who wants a financial advisory account, we're agnostic. And by the way, they may start in one channel and move to another channel. And so the opportunity just to increase the number of corporate relationships we have. And I think the number last year between Equity Edge and Shareworks, we had 500 corporate wins. And we continue to see really good receptivity around the product and the offering. So increase the number of corporate relationships, give us more access to the employees, build those relationships and convert them to clients over time. So I mean that, in and of itself, is just a huge feeder opportunity for us. And then I know you said you've been extraordinarily busy. You've got a big conference going on. But we also made another announcement, yes, Tuesday, I think, that the -- we entered into an agreement with Wilson Sonsini, and we basically are migrating the clients that they had on their private cap table software onto the Shareworks platform. So again, we continue to invest in this business. We like this space. And what this now gives us is really, from the day that a company is sort of the idea is born, we have the capability to have that handful of employees in the cap table, all the way to the end of the life cycle of that company. So private cap table, they need liquidity pre-IPO, we can do that. They want to go public, connecting the dots, right, ISG into the workplace, we can do that. Direct share program, financial wellness and literacy and education, we can do all that all the way through 401(k) to the employee retirement. So this is another perfect example of just continuing to invest and continuing to improve our capabilities. And the really interesting and amazing thing about it is just the scalability, right? We have -- now are developing digital relationships with 5 million people, right, the 5 million participants we have in the workplace. We can take that to 6 million, 7 million, 8 million, and it's totally scalable because it's digital. So this is really going to be an important growth engine for us going forward.

And all of this really validates the investments that you've made in technology, whether it's in the core franchise or in the self-directed platforms and now in the workplace channel. I don't think we've left out much on the technology discussion. But is there anything else to add in terms of where technology is coming into play to facilitate growth in this business?

Yes. Well, I mean, I think yes, there definitely is. And maybe I can pull -- you sort of went through the 3 channels, so let me try to pull them all together. And part of the thesis was they were converging, and technology was going to be critically important. So I've highlighted some of the stuff that we've done on the tech side. But another thing that we're able to do now is we have small self-directed clients on one end, and we have ultra, ultra-high net worth on the other. So our ability to analyze data across the entire spectrum of investors and trying to understand investor behavior is extraordinary. And we're going to take the time, and we're going to go slowly. Again, we didn't do these transactions for a quarter worth of cost savings or earnings. We did these transactions for 10 years of growth. These are going to be our growth engines going forward. So we're going to learn about our clients. We're going to learn about investment behavior. We're going to be able to analyze that data. And we're going to be able to provide products and services for those clients when they want them. A perfect example is if we just take -- if you look at E*TRADE, if you look at the last x number of clients who have left E*TRADE to go to a service model, we could analyze if there are attributes that are consistent across that client base to try to discover and identify other people that fit that criteria, to get in front of that before they make a decision to leave. We have the FA model now, and we can convert that client or retain that client and bring them to another channel. And we have the tech -- how do I describe it? So on each side, right, we have the self-directed client on this side, and we have the FA client on this side. So we have the tech and we have the talent that we need to support all of them. And that is no small undertaking. I mean this idea that you can refer a client from A to B, it's not that easy. I mean we have an extraordinarily complicated and sophisticated CRM system. We have FAs that are approved. We have FAs, so we can pair people, algorithms that run to pair our clients looking for something with an FA that makes a good fit. So we have these 2 great -- we have tech, and we have talent, and we're seeing that converge. And then in the middle, you have this huge funnel that I just talked about, which is a workplace. So we can continue to increase corporate relationships, continue to increase the number of participants. That funnel is going to lead to clients going in both direction. And that is the real opportunity. So tech is an enabler for communication, data analytics, efficiencies. I mean everything we do has a tech bend to it in that business, and it's really scalable. And what's going to be important for us is to have that integrated experience across the entire platform. And that's really what we're working on. And that's what we're going to do. We're going to take it slow. We're going to learn more and more each year, but that is going to be a key driver to the future opportunities for us in that -- in the wealth management space.

Okay. Perfect way to kind of switch now from wealth management to investment management. And you did announce the closing of the Eaton Vance will happen, I think, March 1 is Monday morning. So let's talk about your preparedness to close the transaction and, broadly speaking, the health of the investment management business.

Sure. Well, we're definitely prepared because we've publicly announced on Friday that we're going to close it on or about March 1. So we're really excited. We have all the consents. We have -- we've done all the work to get that to the process. The election process is coming to a close here in terms of stock or cash for the shareholders, and we'll be in a position to close that on the 1st. So checkmark, number one. Number two, the underlying health, right, both MSIM and Eaton Vance. So Eaton Vance announced earlier in the week their first quarter, which is a January 31 fiscal quarter, they announced their results, just extraordinarily strong momentum in the business. When we announced a deal, they had roughly $500 billion of AUM, now up to $584 billion. They had $20 billion in net flows this past quarter, so just real strong momentum. And the excitement around why we did the deal, I mean, again, continues -- our excitement continues to grow, right? We've talked about customization and sustainability, 2 trends that are accelerating in the last couple of quarters. So both power metrics and the Calvert funds doing extremely well. We talked about marrying distribution there, U.S. distribution with our international distribution. We think there's real opportunities there. And then the value-added fixed income scale and products they brought to the overall platform. So Eaton Vance momentum performing -- momentum very strong, continues to perform very well. We've made it through sort of the first step of sort of post announcement, pre-closing, the momentum in that business continues to be quite good. Turn over to MSIM, and our business also continue to see good strong momentum, positive net flows, AUM with the asset levels continue to grow. And the fee-based component of that business for us continues to grow at a really nice pace. So bringing together 2 companies, good momentum in them, both of them independently, we're going to bring them together. Again, this wasn't a deal for costs. This wasn't a deal about next quarter or the quarter after. These were deals that are going to set us up for the growth for the next decade, and we're going to take it slow. We're going to bring the 2 cultures together, bring the firms together, and we'll start to realize the upside and the synergies of that deal over time.

So -- perfect. So if we bring all of this together now and think about this, weaving it into the 17% plus longer-term ROTE target that you laid out in January, which, to me, signals a higher level of confidence in the return capabilities or capacity with the recent acquisitions that you've done, let's just kind of wrap this up revisiting how it is that you get there, having covered revenue growth prospects, considering expense and really circling back to technology to facilitate that move to 17% plus.

Yes. Listen, I mean we do have real confidence in our targets. I think you know that about us. We give you targets, and then we hit our targets. And it's really been just the journey in the transformation. So I talked about the revenue side. We've been extremely disciplined on the expense side. We continue to think we have businesses at scale and have operating leverage. And we now have 3 world-class businesses, all of which are at scale. And then the last component is capital. We don't need a change in the capital framework. The SCB is the capital framework. We would like to see it implemented and put into effect as it was intended. And so part of us getting to the 17% plus ROTCE is getting our capital more in line with our SCB, clearly, with a cushion or a management buffer on top of that. But we don't need a change in the capital framework, and we don't necessarily need a change in the environment. We think we can get to these targets based on our current positions, our current share and the opportunities to generate synergies and growth in the core business.

So you touched on capital efficiency. And if we didn't have at least one moment to talk about CCAR in this presentation, I know you would be terribly, terribly disappointed. And so let's just touch on for 1 minute here CCAR 2020 round 2, where you did meaningfully better in terms of the implied cost of stress. And I'm wondering, as you think about this year's scenario, looking a lot like CCAR 2020 round 2, do you have the sense that the Fed has taken, let's call it, the market-sensitive businesses out of a penalty box in the post-Lehman period to better kind of appreciate the manageability of those businesses in a stress period?

Listen, I mean it's -- no one knows. You can ask Vice Chairman Quarles about his view on that. But I think -- listen, I think the Fed stress test has been critically important to give people confidence in the system and has done that and just look at the performance that we had during this previous crisis. I think the Fed test over the last couple of years has sort of been in this -- you and I have talked about it, sort of a severity envelope. And I think it's staying within that severity envelope. We feel very comfortable that we can manage our business and generate the returns that we need or that we've highlighted or that we've targeted. So our hope is that the capital framework gets implemented, they don't change it. It actually -- it's working as intended, I think. But I think from our business mix perspective, as we integrate these deals and we continue our transformation, I think the trend of our capital requirements should go down over time, particularly around PPNR, where you've heard James talk a lot about how the Wealth business is treated in that stress test. So our hope is capital framework stays the same. You've heard Vice Chairman Quarles talk about how he thinks there's enough capital in the industry. Even Chairperson Yellen and some of the confirmation and some of the comments that she's made recently, we have enough capital in the industry. I think the performance of the industry [ written ] large shows that we are well capitalized and can perform under stress. And then our business model should get us to better capital outcomes over time. But there's no such thing as a straight line in this world, and things take time, but we like the direction to travel.

And I think we appreciate that your commitment to repurchasing $10 billion in capital -- $10 billion worth of capital this year as the means to get you down to a more efficient capital level overall, albeit with still a pretty significant cushion between there and your SCB requirement, facilitating the achievement of higher returns. So I think you've projected a great deal of confidence over the course of this 40-minute discussion. I very much appreciate how candid you've been and really kind of driving us deeper into that workplace opportunity. We have 1 minute if there's any other comment you'd like to make or we'll go from there.

No. I -- again, I think we feel very good about the business. We feel very good about our positions. The general thesis is we've got really nice momentum. We think we can continue that momentum. We think we can continue to capture share in those businesses, and we're very confident around the targets that we laid out earlier in January.

Wonderful. Perfect way to wrap this up, Jon. Thank you so much for participating once again.

Great. Thank you, Susan. Everyone, stay safe.