Morgan Stanley (MS) Earnings Call Transcript & Summary

Thanks for joining us here. I am pleased to have with me Andy Saperstein, Co-President of Morgan Stanley and Head of Morgan Stanley Wealth Management. Andy will start with some slides, and then we're going to move to Q&A. But before I hand over to Andy, I do have a quick disclaimer I will be reading. This discussion, and the one with James Gorman later today, may include forward-looking statements, which reflect Morgan Stanley management's current estimates and are subject to risks and uncertainties that may cause actual results to differ materially. Morgan Stanley does not undertake to update the forward-looking statements. This discussion, which is copyrighted by Morgan Stanley and may not be duplicated or reproduced without their consent, is not an offer to buy any security. Okay, the disclaimer is out of the way, Andy, and I'd like to turn it over to you for the presentation.

All right. Thanks, Betsy. Good morning, everybody. It's great to be here. Before I join Betsy for some questions, I just want to share some thoughts around the business and our strategy going forward. So at Morgan Stanley Wealth Management, we transformed ourselves from a stable, steady wirehouse into a scaled multichannel growth engine. There've been 3 phases. First, over the past few years, we invested heavily in our core advisory business, particularly in our modern wealth offering. Our intention was to differentiate ourselves from traditional competitors, capture share and achieve an industry-leading organic growth. Second, and more recently, we've begun to build out new capabilities and channels largely through acquisition in order to accelerate our growth by broadening our ability to reach and serve new client segments. And third, going forward, we aim to realize this opportunity by integrating our new capabilities, building selected gaps and further investing in innovative technology solutions. Now the punchline here, as I'll describe this morning, is that our business model and our performance clearly differentiates us from any existing competitor, essentially making us a category of one and uniquely positions us to capture share through organic growth going forward. So I want to start with a quick reminder of where we came from. We launched our Modern Wealth strategy in 2016 with the belief that supporting world-class advisers with cutting-edge technology and resources would be the winning formula in the Wealth Management business. As you can see from the slide, we've executed, and we transformed the business. Now on the left side, you can see the improvement we've had in driving net new assets. And on the right side, you can see the contribution that this organic growth, together with the market and E*TRADE, has had on our total asset levels. We've doubled our assets in the last 5 years to $4.2 trillion. Now within that growth, it's also important to look at the quality of the assets that we're bringing in. The fee-based flows we generated over the past year are twice what they were back in 2015. Last quarter alone, we brought in a record $37 billion. We doubled our total fee-based assets since 2015, and we now stand at almost $1.6 trillion in these stable, higher-earning assets. Now our ability to achieve such strong organic growth has enabled us to capture share and distance ourselves from traditional wirehouse competitors. Over the past 3 years, excluding the assets that we added at the close of the E*TRADE acquisition, we've grown our asset base by 49% or $1.2 trillion. $450 billion or 19% of that growth was net new assets, the other 30% of our asset growth was, of course, due to market appreciation. Now by splitting our asset growth out this way, we can isolate the component that was organic, and we can compare it to our traditional competitors. If you assume that we all have similar asset allocations, which, historically, we found to be the case, then we can assume that 30% of our competitors' total asset growth over this time period was market-driven and the rest was organic. As you can see from the slide, our organic growth is unique within the traditional peer set. At this point in our evolution, the wirehouse comparison is too narrow because our business model and our performance are clearly different. This is by design. We invested more in technology. We support a greater number of specialty businesses. Even though it's still early, we have access to a much broader opportunity set in the form of new channels and capabilities, which I'll discuss in further detail shortly. In fact, if you look at our recent growth, we look much more like a direct firm than a wirehouse. You can see from this page that our percentage growth now compares to that of a leading direct and custodian player. With that said, as always, flow should be looked at over the course of the year. And although we don't expect the growth rates we've seen early this year to persist at these levels, we're confident in our ability to sustainably grow assets at a real healthy rate. And as you can see on Slide 8, our organic growth and, specifically, the growth of our fee-based assets together result in a revenue base that's consistent, durable and growing steadily year after year. We've come back to this chart many times over the years. As recently as 2018, just 2% of daily revenues exceeded $80 million. In the first quarter of this year, all of the days, 100%, are north of that level. So now let me take a moment to describe how we got to this position and why we believe our outperformance in the core advisory channel is sustainable. Now several years ago, we began building out our Modern Wealth strategy. We empowered our advisers with differentiated sets of digital capabilities, tools like Goals Planning System, Next Best Action and Aladdin. We supported them with specialist resources from the firm, people like trust and estate lawyers, planning experts, tax specialists and, of course, our world-class research organization. We also deepened our product platform, building out a more robust and sophisticated product shelf, particularly in areas like alternatives, to the point where our alts business is almost as large in assets as all the other wirehouses combined. The intention was to enable advisers to focus their time on building deep client relationships while partnering with the firm to help provide sophisticated solutions to complex problems. Now it's noteworthy that we were investing in these capabilities while markets were relatively stable and rising. We always believed that volatile markets and complexity would favor our business model, and we built out our capabilities in preparation for these conditions. When we first introduced these tools at our Tech Expo in 2018, the obvious question many of you asked was whether we could drive adoption. And at the time, we felt confident we would. The pandemic was an accelerator. And when the pandemic hit, volatility spiked, as you all know, and markets plummeted, giving our advisers a distinct competitive advantage. They have unique and sophisticated tools to provide clarity and transparency to clients and help them navigate through the volatility. As you can see on the slide, we've had terrific utilization of these tools. Our integrated Aladdin risk management is an excellent example. It gave advisers the ability to easily run sensitivity analyses for their clients to evaluate how different pockets of dislocation could affect their overall portfolio. Well, it wasn't just our advisers who adopted the new technology. During the pandemic, our clients also adapted quickly. They became much more comfortable with the new technology. Videoconferencing is a great example. It enabled advisers and clients to work together even more efficiently, and it will remain an important part of adviser-client communication even after the pandemic has passed. But our advisers took it one step further. They used technology to leverage the firm resources I just discussed and ramp up the creation of their own virtual teams. With the new technology, advisers could much more easily meet clients and prospects, in front of these specialists, and harness the full power of the firm in serving them. The ability to create virtual teams has enabled our advisers to work much more efficiently, to scale their practices and to greatly increase productivity for their teams. In my view, this is a phenomenon that's been underappreciated by many industry observers. This type of partnership is a real powerful catalyst that's enabled successful advisers at our firm to transform their practices and accelerate their growth. At this conference back in 2019, I talked about adviser productivity as being a major driver to our growth. I said we'd see mega teams of $50 million or even $100 million in revenue within 5 years. We're already seeing that. The partnership dynamic between advisers and the firm, aided by technology, has accelerated the trend. To give you a sense of the magnitude I'm talking about, since the pandemic, roughly half of our teams have grown by more than $100 million, and more than 50 teams have grown by more than $1 billion. To put that into context, for most advisers in this industry, their entire book is less than $100 million. These teams are growing assets at an incredible rate. And not surprisingly, the partnership that we've created between the firm and the adviser not only drives productivity, but it also helps create adviser loyalty. Our internal surveys show that advisers have never been prouder to work at Morgan Stanley. And satisfaction within the firm and the resources that we provide is at an all-time high. So it's not surprising that we rarely lose advisers to competitors, and we've significantly reduced attrition over the years. And it's even more rare for us to lose an adviser to the RIA channel. I often get asked about the impact that the growth of RIAs has on us. The short answer is, it really doesn't. We've lost less than 0.2% of our overall assets to the RIA channel in the past year, and that's been pretty consistent over time. It's not just advisers that are happy. I mentioned our extraordinary client retention at this conference in 2019, and that still persists. All right. Now we'll transition to some of our new channels and capabilities, which greatly enhance our opportunity for growth going forward. They add value in 2 ways. First, as represented at the top of the page, they provide us alternative sources of acquiring new clients; and second, at the bottom, they enable us to serve different client segments through different service and relationship models. Now historically, the only way we were able to attract clients to our advisory platform was through the advisers themselves, who were obviously limited in how many prospects they could realistically generate and cultivate, given that they also have a book of clients to serve. Now we have the ability to source new client relationships through the workplace and through E*TRADE's self-directed platform. We cannot only reach out to the end client directly, but this also provides a much more effective way to reach younger clients earlier in the wealth accumulation phase of their lives. We also now have new capabilities to address different client needs and preferences through different service models. In essence, we meet clients where they are. This gives us a breadth that no other firm in the industry can match, again, making us a category of one. Our aspiration is to be the wealth manager of choice for every investor, regardless of their age, stage of life, channel preference or level of wealth. Now on the digital side, what E*TRADE brings to the table is clear. They've added more than 5.5 million new self-directed relationships to our platform and meaningfully contributed to the growth of self-directed assets. They have the highest-ranked mobile trading app and a leading active trader platform. And our Equity Edge platform is a leading stock plan administrator, which, when added to Morgan Stanley at Work, essentially doubled the size of our overall equity administration business. That's incredibly important for Morgan Stanley. Now we can use the scale of our business to support investment in the E*TRADE platform, to ensure that we maintain and increase the leadership position E*TRADE already enjoys. But equally importantly, E*TRADE helps fill some historical gaps in our offering, just as Morgan Stanley helped fill historical gaps in E*TRADE's offering, where, together, our integrated business model becomes substantially more attractive. For example, as we've shared before, we're in the process of connecting E*TRADE as a companion account across all workplace platforms. We estimate that there are hundreds of billions of self-directed assets held by our existing high-net worth clients in other digital firms. We can now focus on consolidating those assets to E*TRADE's platform. We can extend the Morgan Stanley's products and capabilities to E*TRADE clients, things like alternatives and lending products. We can grow with existing self-directed clients as their needs evolve. They may not be ready for advice yet. That's okay. But someday, they may be. We don't need a huge percentage of E*TRADE self-directed clients to adopt full-service advice over time to make a meaningful difference. And finally, over time, E*TRADE has the potential to support some of the international growth efforts that the firm is in the process of developing. Now I'll turn to the workplace, which provides a sustainable source of growth. We have a powerful combination of 3 firms coming together to deliver this offering: Morgan Stanley, Shareworks and now E*TRADE Equity Edge. We have a leadership position with our workplace offering already. We're #1 in U.S. public plans, #1 in U.S. participants, #1 in unvested balances and we're covering 40% of S&P 500 companies. The workplace channel gives us access to employees that are early in their wealth accumulation journey. One way to think about the scalability of the strategy is that the channel creates a big funnel of client and asset acquisition. Those relationships start in the workplace and they end up as wealth management clients. As you can see from the right-hand side of the page, there are 3 key steps to the migration strategy. The first is to gain access to as many employees as possible by winning B2B mandates. As I mentioned, we now have more than 7 million workplace participants, and that number is growing every day. Second is building trust and credibility with these employees. Many of them are just being introduced to investing and financial planning. Here, we deliver the unique intellectual capital of Morgan Stanley in the form of training, education, research and other content delivered either digitally or through our advisers in order to set up the third step, which is converting a participant prospect into a wealth management client, whether that's a full-service advisory relationship right away or in a self-directed account, where we'll deepen the relationship over time. The workplace channel is distinctive because it delivers privileged access to employees that's endorsed by their employers, enabling us to reach out while money is in motion and they're making financial decisions, where we can bring our resources and brand to build relationships at just the right time. It's early days, but we're already seeing the power and the potential of this differentiated access. The workplace represents an enormous opportunity for us. Now let me dimensionalize the overall opportunity of having added these new channels for you. When we were first embarking on the Modern Wealth strategy, we talked a lot about the $2-plus trillion of assets held away by our existing clients. And as I've discussed, we've had success consolidating those assets to Morgan Stanley. That's what's helped drive the growth we've had to date. However, now, the opportunity in front of us has expanded to $8 trillion in assets held away, more than 3x what it used to be, and that's just with our existing relationships. We'll continue to consolidate those assets to Morgan Stanley and all the while these channels will continue to grow and replenish. It's truly a reinforcing virtuous cycle. So let's switch gears to the final topic, what we're doing to realize this opportunity. And I want to bring back a visual that I shared earlier. Obviously, the pace of our growth depends on how effective we are at developing relationships with the individuals holding the $8 trillion of assets held away. The key to success is to learn all we can about them so we can anticipate their needs and seamlessly direct them to the areas that best serve their needs and, of course, deepen those relationships over time. The glue that holds all this together is our client engagement ecosystem, as highlighted in the middle of the page. We call it an ecosystem because it's not just one piece of software or a tool, but it's an integrated collection of components that work together. I'll describe 3 key elements of that ecosystem: platform integration, lead management and our client data genome. Platform integration is the process of stitching together the various capabilities across Morgan Stanley and E*TRADE so they seamlessly connect. The integration process has exceeded our expectations, and we're well on track of our 3-year integration plan. And we continue to, of course, prioritize the client experience. We built our lead management platform called LeadIQ to optimize distribution of workplace plan leads to the 1,500 or so advisers that we preselected to receive those leads. It uses machine learning to leverage all the data that we have about a relationship and all the data we have about an adviser, including their historical close rate with clients. Now LeadIQ generates a match and the lead then shows up on the adviser desktop. We then track adviser outreach and success rates in opening up a full-service advice relationship. Again, using machine learning, LeadIQ just becomes more effective over time as it learns more. We're now in the process of expanding LeadIQ to include leads from the rest of the workplace platforms, including Equity Edge and Retirement and also for self-directed clients in the E*TRADE channel. Now our emerging client data genome is the system that we're building to leverage Big Data and analytics to understand how our clients are using different parts of our offering, and then ensure that they're being offered services that they value most. You need to learn about those clients. We built out a data and analytics team of more than 250 data scientists, PhDs and engineers, making sure to supplement those that have a financial services background with folks from other industries and leading tech firms. Although it's still early, we're already very pleased with our conversion success to date. And as we build out those capabilities, we'll just keep getting better and better at deepening these relationships. Ultimately, what we're doing is tapping in to that $8 trillion pool of assets and consolidating them to Morgan Stanley. Now at this point, I've obviously focused on the wealth part of the Morgan Stanley story. But the connectivity our business has with the rest of the firm has grown significantly, and the capabilities that we've added have created new opportunities. Now if you think about it, the institutional client journey and the wealth management client journey are linked through the workplace, which means we can create incremental value by partnering across Wealth and ISG, and that's exactly what we're doing. On this slide, you can see the breadth of services we've delivered to the corporate buyer through our Morgan Stanley at Work and Wealth Management offering. And what we've also highlighted here is that with the exception of perhaps the earlier startups, these companies are clients of our Institutional Securities Group as well. As you can see, between Wealth Management and ISG, we have offerings for companies at every stage of their life cycle. Think about the power of that. We're now meeting with clients together, talking about how we can serve their needs across Morgan Stanley. We have more tools in the toolkit than competitors, which means that we can grow with our clients and deliver corporate services to create deeper and stronger relationships. It's a completely differentiated offering, where we have essentially cradle-to-grave services for both the institution and the individual, which leaves us with tremendous prospects for future asset growth. Again, we're a segment of one. This is something that Ted and I are both excited about, and our organizations are working together in complete partnership to attack the opportunity. You'll hear us both talk about this opportunity over the coming months as we build out the offering together. And the last point I just want to leave you with, before we go to Q&A, is about the strength of our bank offering. Our deposit base has doubled since 2015, reaching more than $320 billion in the first quarter this year. And our lending business similarly has doubled in size to over $100 billion. Our business will benefit from the eventuality of higher interest rates, of course. We previously disclosed in our Qs that 100 basis point increase in interest rates would increase net interest income for the U.S. banks by approximately $1.6 billion, which is broadly representative of the impact of higher rates on Wealth's NII. And while we're confident that the continued growth of our business will, alone, enable us to achieve margins in excess of 30%, obviously, a 100 basis point increase in rates would put us north of 30% much sooner. So to summarize, over the past 5 years, we've fully transformed our Wealth Management business. We're uniquely positioned in this industry, and we should be viewed that way. Our core adviser business delivers strong, consistent organic growth, and we're in the process of integrating 2 new channels, which will accelerate that growth. And of course, the rising interest rates will result in a more immediate material uptick to our profitability. For all of those reasons, we're really excited for what's ahead. And with that, I will turn to Betsy for the Q&A.

Andy, thanks so much for a great slide presentation. That was very helpful digging in. I do want to let the audience know we do have the opportunity to ask questions via the browser. So type in some questions, if you have them. I will kick off first, though, Andy, with really a question around Eaton Vance. You did talk a lot during the presentation around how important E*TRADE has been in achieving the vision for Wealth Management. So I do just want to understand, on the recently closed acquisition of Eaton Vance, how do you see those capabilities fitting into your strategy?

Yes. Thanks, Betsy. I'm glad you raised it. That's an important point. As folks know, even before the Eaton Vance acquisition, MSIM was increasingly important partner to Wealth Management. Honestly, the progress they've made with Dan's leadership in building out their product and solutions suite over the last 5 years has been really incredible, and advisers fully took notice. It really resonated with them. So looking at Eaton Vance, one of the most attractive opportunities of partnership for us is Parametric's custom indexing capabilities that can create some really interesting product innovation opportunities, particularly, in my opinion, in the workplace channel. As part of the core stock plan offering, we can bring an asset management product to like a large tech player that provides exposure to an index, but excludes the exposure to either that particular company or the tech industry overall, while still keeping index tracking error to a minimum. So the proposition to the corporate buyer is that not only can we manage your equity plan administration, but post vesting, we can create a low-cost customized asset management product that will improve your employee's total asset allocation by minimizing concentration to their company or to a particular sector. That's a really value-added offering to the employer and helps us become a much more attractive partner. And then if you look at the employee as a prospect for Wealth Management, it gives us a path to a deeper wealth management relationship, starting with those -- the assets that post best. The one other real quick thing I'll just say about it is, is around tax-efficient investing, which is another area where we can leverage Parametric's capabilities. It's a top -- well, a number of our clients are extremely focused on, as you can imagine, particularly now, as we're working through ways to seamlessly embed tax-aware investing, things like loss harvesting, intelligent withdrawal into our platform. And we're really excited about some of the solutions that we'll be able to deliver to our clients.

Great. Okay. Thanks, Andy. Second question that's come in here, you talked about the workplace opportunity to grow with companies as they mature. And earlier this year, you announced a partnership with Wilson Sonsini in the private market space, I believe. Could you talk about how that fits into the story?

Yes, great. Yes, sure. I'm glade you picked that up. What hopefully came out during my prepared remarks, and I covered it explicitly on one other slide, is that we have a strategy to build our relationships early and then grow with the client over time, whether it's an institutional client or a retail client. As you know, in past years, firms generally focused on money and motion events and financial services, things like the 401(k) rollover, the IPO liquidity event, 529 incentive for the birth of a child, things like that. But if you think about it, given the way the industry and, I guess, advice, in general, has evolved, if you just show up for the money in motion event, you're kind of too late. The average client rolling over 401(k) assets to an IRA likely already has a source of advice. And if you think about the corporate side, companies are staying private longer. So multiple rounds of liquidity typically occur long before the IPO, and the founders already have a financial adviser by that point. So our focus on the private market space is about building relationships earlier in that cycle. So we serve, as I mentioned, 5,000 corporate plans. We already have 2,500 private market companies on the platform. They're an important pipeline for the public equity business and, as I mentioned, the source of wealth relationships. But we need to make sure that we're always replenishing that pipeline. It's that funnel that I talked about earlier. And we have a really active sales effort in the private market space, part of which is going direct to companies, but part of which is having partners that can be like force multipliers, like VC firms or incubators and law firms. And that's where Wilson Sonsini comes in because they are a premier firm in that space. The partnership we created with Wilson Sonsini will help companies that use Wilson Sonsini's proprietary cap management software today to migrate to Morgan Stanley's Shareworks' capitalization and stock plan platform, making it really easy for Wilson Sonsini's partners to add and update and download cap table data. We're really -- we're happy with the partnership so far. It's yielded some great results. And we're excited about how it will help us jointly serve companies in years to come. The last point, as long as we're on the private market space, I just want to make, is that it's not just a benefit to the Wealth side of Morgan Stanley. But again, as I mentioned before, there are huge synergies with the Institutional side as well. Obviously, these companies need to tap the capital markets as they grow. And our investment banking partners are often at the table with us as we're helping those companies chart a path for that growth. So again, great, great synergies between us.

Okay. Thanks, Andy. That's very exciting. We have time for 1 more quick question so let me close with something that was clearly a point in your presentation, growth. Where do you see client assets headed here?

So as I said earlier this morning, you can -- we doubled our total client assets in, I guess, 5 years to $4.2 trillion, which is where we sit right now. So it's a fun question. If you extend this out another 5 years, and if you just take a conservative view of our net new asset growth and modest market appreciation, you could drive 10% annual asset growth. And I think that's a pretty conservative estimate, which, within the next 5 years or so, we'd exceed $7 trillion. So that's not a bad aspiration to have. And by the way, that is the way we think. So we're really excited about going after that opportunity, and we do see a path to achieve it.

Okay. Thank you so much for your views here, Andy. Really appreciate the presentation and your outlook.

All right. Thanks, Betsy.

All right. And now we'll move to the next session. So thanks very much for joining us, everyone.

Thank you for joining us. I'm pleased to have with me this morning, James Gorman, Chairman and CEO of Morgan Stanley.

Great to be here. You had no choice, you're in our office.

Isn't that awesome? How do you feel?

We're back. Great to be back.

Is this one of your first meetings with somebody outside of your operating committee or?

No, I've had a few. We've had a few clients come in lately and a bunch of people from -- through the building and around a few offices, but it's not -- no international. So it's only really what's inside this building and then a couple of clients coming by. But it's beginning to feel normal again. I love it.

So this is a step function to next year when we have this with 200 people in front.

Yes, hopefully.

Okay. Very good. So let's start off on the question list with some of the management changes that you recently announced. You recently named Co-Presidents, a COO, new CFO, other changes. Can you walk us through your thinking, how you and the Board are thinking about this, the generation that comes after you and then after that?

Sure. Well, I think my job description should be to manage Morgan Stanley as best as I possibly can with what we're dealing with, but also to position it for the next decade or 2. And I take succession planning really seriously. I did it from my very first Board meeting because you never know in this world, and you've got to be prepared. And we've got the luxury of some time here. I'm not leaving in the next few years. But we also need to formally start grooming people, giving them more experiences, more exposures. And we've got a terrific team. We've got 4 or 5 people at the top who could replace me. And we're also building, Betsy, the generation below them. And there's a whole group of people in their sort of early to mid-40s that I think are really talented executives. So my hope is that we're setting up a sort of 10-, 20-year runway with what should be a smooth internal transition from me at the right time and then another group of management behind them to help drive the firm for the future. It's terrific. I mean you've -- some of the names you obviously mentioned, John is our CEO. Dan Simkowitz, who runs all of asset management, including Eaton Vance known as co-running strategy. Ted and Andy, we've named as presidents. They run our largest businesses, and we've given some increased responsibility. Sharon stepping in as the CFO. So we've got -- and there were a lot of other changes beside. So I'm thrilled about it.

So one of the questions that you've been getting or at least have been out there is what about the diversity of the organization, of the leadership? Could you speak a little bit to that?

Yes. I mean I'm deeply committed to it, as I think you know. And we've made a lot of progress in the last decade, but we're -- we can't take something that doesn't exist and just pretend. We have to get people who are ready to take on more responsibilities. But if you think about the diversity, I mean, the media didn't really give us much coverage on it, but a new woman as CFO. We have a woman running Europe, Middle East and Africa. We have a woman as Co-Head of Asia and Head of China. We have a woman as Co-Head of Investment Banking. Woman as our Chief Audit Officer. African American Man as our Head of Talent and Human Resources, Mandell Crawley. And I could go on. So there's actually a terrific depth that just, unfortunately, reality is it's not one of the likely people to replace me. But again, depending on the timing of that, I guess that could change. And you've got to be honest about the reality. And I'm excited about our new diversity and inclusion institute. I'm excited about the pipeline, the incoming group. And over the next 4 or 5 years, more of these folks will be at the very top of the house, which Sharon and some of the others are now doing, Clare Woodman in Europe. And so we've got the talent. We just don't have them at the tippy top just yet.

Okay.

By the way, I did replace a woman as President here, and I put a woman and is our first CFO, Ruth Porat.

So there you go.

I'm committed.

You have a track record here.

Yes. Absolutely.

Okay. Before we get too far into the conversation today, I did want to just ask about the quarter. We're about 10 weeks in, right? How would you characterize this quarter, the market this quarter and especially as it relates to client activity and engagement?

Kind of interesting. I mean I've already seen -- and I'll talk mainly about ISG, the institutional businesses. Because in Wealth Management, it's sort of doing exactly what we expect it to do. And that's the beauty of the Wealth Management business. You start January 1 of the year knowing almost exactly within a couple of hundred million, how the year will play out. And we'll get to the deals that we've done, and Asset Management, similarly, we'll get to. But in institutional, particularly the trading, the underwriting and M&A, we've almost had 3 separate periods in this quarter. So it's a little hard to figure out exactly how it's going to land because we've still got, I don't know, 15 trading days or something left. It started quite strong. And there was a period of about 3, 4 weeks where I felt people were sitting on their hands a little bit, and now it's reenergized. So in aggregate, it's probably back to normalized. Obviously, it won't be where we were in the first quarter, which was gangbusters, or a year ago. They were the 2 best quarters by far in our history, but certainly not a bad quarter and some really encouraging signs. I mean the M&A pipeline and closure has been very strong. Equities has rebounded very nicely. Fixed income is where -- the first quarter and a quarter a year ago, fixed income was sort of $3 billion-ish a quarter. Remember, my original target was $1 billion a quarter run rate, well, we're well above that. We'll be well above that. But we won't be $3 billion. And I guess the only other thing I'd say on the transactional activity, not the crazy stuff you saw in the first quarter with -- although that's picked up again, this is on the retail side. But we never really had a lot of that. We don't have a lot of that. In E*TRADE, we have a little bit of the day trading, for sure, but it's a much more stable day trading, almost a professional day trading group. So net-net, the quarter is going to be good. It should be good. I mean, the flows look like they'll be good, but more normalized in terms of just ISG, and that's really driven by what's going with fixed income. And what I care about, last thing I would say is, what's our share. And we can't control the market. And we've taken fixed income from, boy, post-crisis, probably 5% share to in and around 10%. We're actually a little above that last quarter. Equities has been #1 almost every quarter for the last several years. Obviously, with the quarter last, we had a hiccup, but I expect that will bounce back nicely.

Okay. Great.

Yes.

Sounds good. What about medium-term opportunities here? How are you thinking about the business looking out, I suppose, a few years?

Just really excited. I mean I've not felt -- I'm pretty confident by nature because it's easy to lead with confidence and optimism. But I haven't felt this good about the fundamental drivers of growth that we now have I think ever. I mean the E*TRADE deal has been a home run on so many levels. It's giving us direct access. The combination with Solium in the workplace space has been a complete just dramatic success. Eaton Vance, we've closed more recently, but that's going great. The Parametric product, as you know, is phenomenal, cover funds in the sustainability space. So there are legit growth drivers. And you saw that in the first quarter. I think we had $105 billion net new money in the Wealth business and about $40 billion in the Asset Management business. I mean, for most of the last decade, we haven't done $105 billion in new money and $40 million in a year. We're doing a -- okay, it was a very hyped up quarter, but it hasn't stopped. I mean it may not be -- it's not going to be at that level on the wealth side. Asset management, who knows, could be, but it's very strong. So I look at workplace, I look at digital, I look at the bank, we've got $300 billion of deposits. Our loan growth is great. Our credit losses have been terrific, very low. So the bank is great. The share in institutional is very strong. The net flows across Wealth and Asset Management are phenomenal in the workplace. I just think 10 years from now, it's funny, Betsy, people -- a few people took some shots about what we paid for Solium. And I think we paid about $800 million, and it was trading at that point on the Tokyo -- on the Toronto Stock Exchange about $500 million. And I said, okay, a $300 million premium? But that's a few weeks of earnings in wealth. That's what you've got to do sometimes in order to position yourself. That positioned us for the E*TRADE deal because of the workplace side. So -- and then last thing I'll just say, the technology they've built, particularly across the wealth business, this LeadIQ idea when prospects come in fitting them with the right adviser, next best action, virtual financial advisers, technology is going to drive that business much more than we think. So I think we're going to be compared over the next 5 years much more to a certain West Coast direct player that's done a phenomenal job, the kind of growth they've got than our traditional wirehouses.

Yes, Andy was making that pitch this morning...

It's real. I mean it's not a pitch. It's real. You look at the net new flows, you look at the quality advisers, you look at the number of people we have in the top 100 and the Barron's list, the top 10, the top 100, the top 1,000, it's overwhelmingly Morgan Stanley.

Well, one of the other interesting things you're mentioning here is that your net new money flows has kept up in this quarter.

Not at the $105 billion. I'd be -- that won't happen. I mean that -- obviously first quarter. Second quarter, you have tax issues. So you have outflows as people pay taxes was delayed to May because tax was delayed a month. But they're still very healthy. I mean we'll do flows in this quarter, which, against our historic leverages, would be great.

And this is coming from your clients, new clients, not really the people who are getting the stimulus checks, I'm thinking?

No. No, it's got nothing to do with that. But it's also -- I've been doing this for 20 years overseeing wealth businesses. This is the first time I've ever seen a wirehouse, traditional wirehouse with net new flows of financial advisers. I just had a call this morning from one of our competitors, a financial person. I obviously won't say who it was or what firm, but asking me put in contact with. This is going -- we are net positive every single week in advisers. And it's not because we're paying souped-up deals. It's because the platform is working. And so if you've got very low attrition, very high attraction, workplace kicking in and the technology driving stuff, you've got 4 vehicles of growth, which we used to have high attrition, no attraction, no technology, no E*TRADE, no workplace. We've figured all those out. So I think the next decade, it's -- I'm really excited.

So let's talk a little bit about the integration that you're doing because you've got an opportunity to bring these 3 businesses together even more closely, right? So what's your plan of action there?

Well, the integration is going very well. The piece that is most complicated is the workplace because we're then combining the old Morgan Stanley workplace business. This is the stock plan business, employees who work with Solium with E*TRADE. So you've got 3 platforms, and we're in the middle before we did E*TRADE of combining Solium and the Morgan Stanley business. So it's -- that takes a little time to make sure -- the last thing we want to do is create a bad client experience for those on one platform or the other. So we're going to be very careful in the integration of that. But other than that, the -- Andy just announced all the management changes. Mike Pizzi is moving over to run the bank, which I'm excited about. A number of the senior E*TRADE executives are now in senior roles in wealth. So it will be fully integrated. That's going great. And Eaton Vance, it's early days. But again, Tom Faust is on our Management Committee, fantastic executive. The whole team that they've got across -- in some ways, it's the easiest deal we could have done. The platforms are very distinct, very different. A little bit of overlap in the fixed income space, which we've now -- we've sorted that out. So I think the integration of that -- and Eaton Vance has performed better than our models predicted going into the deal. E*TRADE has performed better than our models predicted going into the deal. Now a lot of people said to me, you'll probably remember, you paid a $1 billion too much for Eaton Vance and $1 billion too much for E*TRADE and I said, "Yes, but we own it." The other option is, don't pay it and don't own it, let me think about it, no, I'd rather own it. And this is the reward. You get -- sometimes you got to back yourself a little bit. And the team, Dan and Andy, have both done a fabulous job with their respective counterparts.

And what is it about the banks that gets you excited?

With $300 billion deposits, I mean we -- when I joined in 2006, I think we had $2 billion. Not $200 billion, $2 billion, at least $1 billion. Rates are going to go up. Now I know I'm a hawk and I've said I think they go up a little sooner than what the Fed points would suggest. I don't know, maybe I'm wrong about that. That won't be later, all right? So worst case is I'll be where the Fed is. I think rates go up. If we get a 1 point rate increase, we pick up over $1.5 billion net.

100 basis points.

Yes. I'm sorry, in revenue, which almost all of that falls to the bottom line. So it's...

You're talking about 1 percentage point?

1%. Yes.

Right.

Yes. Actually, it's about -- I think it is about $1.5 billion net. And the loan growth, we've -- and I'm interested, Shelley has done a phenomenal job running the bank for many years, and I've asked her to lead our external relations and cover, in particular, our sustainability space, which is a huge for everybody, a huge growth engine. So it's nice to mix it up. Shelley is coming now working directly with me again, which is great. And now we're taking Mike, who's been running the banks as part of E*TRADE in their organization, moving into the bank group. We've got 4 banks consolidated to 2, and we'll see a lot of loan growth from that.

Great. All right. Excellent. Let's turn to capital efficiency. And if we think about Morgan Stanley, right, near term, you have one of the highest levels of excess capital...

Yes. We do.

When you look across the G-SIBs here. And the Fed is about to change the framework to the SCB, right? Or at least it went into place in October, but now it's going to be fully utilized, right, coming out of this next announcement next week, next Thursday.

Yes. 24th, yes.

How do you think about the pace of buybacks once the SCB is put in place? And how do you think about the dividend?

Well, I've said for many years, eventually, the Fed models would show what I believe to be the case. I've probably been saying this for 6 years. And I know investors every now and then, they'd say to me, yes, well, you keep saying it, but it hasn't happened. Said, I don't control the models, but logic tells me it will happen. We brought down the RWAs. We drove up the PPNR. We created capacity where the peak to trough would be lower by definition there, SCB comes down, and it started happening in the last cycle. So it's great. So yes, we're -- we've got CET1 above, I don't know, 16%, 17% now. We're sitting on 300 basis points above. So we have an embarrassment of riches. Some people say, well, shouldn't you immerse in the business? We are. Shouldn't you do deals? We just did 2 of them. Shouldn't you have a buyback? We just announced a $10 billion buyback. Shouldn't you increase your dividend? We will. We're just waiting for the Fed, the CCAR process to go through. We've been -- I've said publicly, we'll increase the dividend. We should. We'll drive our yield up. We should. And we'll still have excess capital, and we're accreting $4 billion in the first quarter. Obviously, we're not going to have another quarter like that this year. But pretend it's $2 billion a quarter, you're at $10 billion. And that would be with pretty blah second, third, fourth quarter. I don't think we'll have a blah second, third, fourth quarter. So let's say the range of our earnings capacity is somewhere between $8 billion and $12 billion, for argument's sake, now, and with growth that's going to creep up high. So $8 billion would be a really bad environment. $12 billion would be a very solid environment. Not spectacular, but very solid. You're doing a $10 billion buyback. Our dividend at the moment is, what is it, $1.40 and 1.8 billion shares. So we're $12.5 billion, $13 billion-ish. We are making almost that. I mean, this year, maybe more. Who knows? And we've still got a buffer of 300 basis points. You've got to start eating into the buffer or shareholders are just carrying excess capital for no good reason. So I think you'll see -- we certainly won't cut back on the buyback. Now that said, if the stock keeps trading, which I think it will, well north of $100, then you start getting into the sort of stuff you'd write about, about our competitors. Really? You're buying back what multiple of book and should we be trading on PE or on book and how you think about that. So you get more circumspect as the stock rises, the dividend obviously have capacity.

Got it. Okay. So $8 billion is a weak year?

That's just in my mind. I mean, $2 billion a quarter -- every quarter, that -- with what we're doing in wealth and asset management, that's a pretty modest ISG performance.

Right.

Really pretty modest. Now you could have it for a year. But on a sustainable basis? That's not going to happen. The probability of us earning more than $10 billion rather than less than $10 billion is much higher, in my view, over the long haul.

So you get your answer from the Fed next Thursday, and it's a different world under the SCB, right? You basically have the ability to take these actions with a Board meeting?

Absolutely, and it's what, again, something I've argued for years. Let's not play this game of the mulligan and you can only bring it down, you cannot bring it up. Tell us what our capital position is. And if we're short, we'll raise capital. If we're long, we'll put it to use in the business or we'll give it back to the owners. It's not complicated. Why would you sit with excess capital inside the institution just because, waiting for what? By definition, the Fed models say, you have enough capital for severely adverse -- not for a normal scenario, a severely adverse scenario over 9 quarters. Great. And you've still got excess above that? Wow. And that's sort of my attitude around the capital. This is trading your -- like your grown-ups, you know what you're doing. You're running a prudent business, get on with it, run it the way you should.

I think it's important for people to understand, it's the first time really in 12 years or so that you and your Board have this opportunity to really run the business?

Absolutely. Now that said, you've got to keep above the SCB every single day.

Right.

Right? It's not like once a year, and whatever, you shrink your balance sheet and all this. No, every single day. So clearly, we will carry a prudent buffer above what our level is. There's -- we have no desire to be cute about this. On the other hand, we shouldn't be sitting with 300 basis points when nobody else is remotely close to that.

Right. Right. Okay. Good. Let's talk a little bit about the capital actions. What could you do investing in your business or technology? Is that something that would eat up any of this excess capital?

I mean it could, but I guess we're investing. I mean, our tech budget is well over $4 billion. We're investing a lot in our technology platform. I'm interested in finding further sources of growth. Now they're unlikely -- we're not going to go and buy a trading book. Boutique investment banking is possible. Wealth management is likely, asset management is likely. Non-U.S., huge opportunities there, potentially doing something in partnership with MUFG. On the fintech side, I mean, once valuations come down to worth a little bit, which I think there will, could be some things we could do as bolt-ons to accelerate the technology drive in wealth, workplace and moving our workplace platform internationally. So we're not -- if we see great investment ideas, you saw it with E*TRADE and Eaton Vance, we didn't wait. Everybody said, "How could you do 2 deals during COVID?" And our response was, they were great opportunities. We didn't pick the timing. So I'm not shy about making the investments if they're visible. Let's not just spend money because we feel we should be investing. No. Give me the investment thesis, the returns on it, then we measure that against doing deals, buybacks, dividends and total capital capacity with the buffer and how do you make all those pieces work. So you will see us still investing a lot in the business.

Okay. But that's not something that would be so significant that it would eat up your excess capital cushion...

No. Highly unlikely. Highly unlikely.

I'm surprised people gave you pushback for doing deals during COVID?

Integration risk. Can you really handle 2 transactions, people working from home, all the classic sort of naysayer, the people who can't see the either -- can't see the world of the possible. Dilutive, I say charts dilutive, unless your multiple changes, then so dilutive. So our bet was doing more in wealth and asset management changes our multiple. And therefore, any deal in those spaces that makes reasonable sense is a good deal. Great deals in those space make insane good sense. And we saw 2 great deals. We'd had E*TRADE and Eaton Vance on the top of our potential acquisition list for probably 5 years. And as you know, I talked to E*TRADE 20 years ago. I've been like chasing them. And finally, it all came together.

Congratulations.

Yes, thanks. No, it was exciting. By the way, we did a survey. 88% of the E*TRADE employees are proud to work at Morgan Stanley.

First one? First survey?

First survey, versus 92% for the parent company and then a bunch of neutrals and a couple, I guess, who are unhappy. But 88% first out of the block. So I thought, it was hats off to their team for helping make the integration work for Mike and his team.

Okay. Great. Good. I just want to let people know that if there are questions, you can put them up on the web. One question that did come in just has to do with return to work. And we are here live in New York. It's James Gorman in the flesh. Just wanted to ask how do you think about...

Suit and tie?

Suit and tie, anything else? You want to just think about with regard to getting people back to work. So part of your message just now was, we can do amazing things remotely. But help us understand what the benefit is of coming back to work and where do you see the organization on that front over the next year or so?

Well, listen, everybody's taken a slightly different posture among our peer group as to how to handle this. And my view is, firstly, we're a very global firm. So we have 10,000 employees in India.

Right.

That's -- they're in the worst part of COVID right now or maybe they're past the peak a couple of weeks ago. They're not coming back to work. That's not a 2021 issue.

Right.

So we have 1,000 people in Glasgow. The U.K. is still coming in and out of lockdowns every couple of weeks. We have 1,000 people in Budapest. Then we have lots of people in markets that are completely COVID-free. So I don't think making a blanket statement to all employees is helpful. I don't think speaking of employees who work at 1585 Broadway in Times Square is the same as speaking of people working in a small office in Topeka, right? It's a different -- so my view is a more nuanced communication is necessary, but make no mistake about it. We do our work inside Morgan Stanley offices. And that's where we teach. That's where our interns learn, that's how we develop people, that's where you build all the soft cues that go with having a successful career that aren't just about Zoom presentations. When will that occur? Well, I've -- my leadership style has been sort of very deliberate, 1 day a week from July through about Labor Day last year, 2 days Labor Day end of the year, 3 days beginning of the year to March. Now I'm at 4 days. And listen, I allow for the fact we have some flexibility. If families haven't been able to get their kids into camp, they have to deal with that reality. Let's not be dictatorial. When the vaccines weren't ubiquitous, we had to deal with that reality. Now they are. If you can go to a restaurant in New York City, you can come into the office, and we want you in the office. Now our position here is that we want people to be vaccinated. Well over 90% of our employees who are in the offices are now vaccinated. And I expect that number would trip up to probably 98%, 99%. And then we'll deal with those who either for health or religious issues or whatever, maybe they can't or they won't, we'll deal with that when we get there. Right now, focus is on the 98%, not the 1% or 2%. So there'll be more flexibility because we've learned that we can function with a little more flexibility. But that doesn't mean, hey, it's Monday, Wednesday and Friday. I mean, Florida, if you want to get paid New York rates, you work in New York. None of this I'm in Colorado, working in New York and getting paid like I'm sitting in New York City. Sorry, that doesn't work. So I would call it directionally very strong without dictating yet. But Labor Day, I'll be very disappointed if people haven't found their way into the office, and then we'll have a different kind of conversation.

Very good. Well, that was extremely clear. Let's move on to the list.

Yes.

You're famous for your strategic list. And first question here is what's on it now?

Well, I don't disclose it, but because we're friends, I'll give you a couple of them.

Okay.

And this list actually, this year was pretty -- it was pretty sort of predictable in some ways. It was integrate E*TRADE. Close and integrate Eaton Vance, they're working very nicely. Raise the dividend. We'll see where we are in 10 weeks, assuming, of course, the SCB comes in. Make some senior management changes to set and train the future team. We're doing that. Develop an international strategy, not for executing this year, but knowing when we come out of this year, what we're doing, Franck Petitgas is leading the charge on that, who runs international, now working for Ted. And Ted and Dan overseeing global strategy. Drive innovation through our technology organization, our businesses. And you heard about some of that this morning from Andy, and I've set a target of a certain number of innovations that I want to see. Get the diversity and inclusion, not just set up the institute, but functioning well. And I think this continues to be a very fraught space, right? There's a lot of emotion, and we need to provide a forum for how we drive diversity and inclusion more comprehensively. No new mistakes. Unfortunately, we had the family office issue in the first quarter and that had better be a once and done deal, which I believe it fully is. So they are some of the things. But it's about really getting the deals done, driving technology more completely through the organization and setting up the future. That would be the way I'd characterize as that list of focus. In years gone by, it was all about fixing problems. Now we're beyond that. Now we're about growth. So how do we set up for growth?

And anything on just risks in general? So what keeps you up at night question.

Well, as you can imagine, after the first quarter, we've done a full review of our margin book across not just prime brokerage, but all of our large single name margin positions and individual positions in Asia and LatAm, U.S. And that's ongoing, and we're comfortable with what we're finding, and we've made some adjustments as a result of that. I guess on risk, the thing that I find most challenging is we're now managing many, many millions of client relationships. I think over $5 million in the workplace alone, $3 million in the traditional wealth business, I think. And with E*TRADE, another couple of million. Then if you add in all the touch points between Parametric and our Dennis Lynch and his growth funds and all the asset management touch points, 10-plus million relationships. Data protection privacy is a big concern for me. Making sure that in a world of cyber attacks that we protect our clients' data. And that's probably the thing I'm most focused on from a sort of resilience platform. The other risk leadership team is stable and growing. I think we're managing that well. The strategy is sound. The deals get integrated. Our capital plan comes through, hopefully, next week. They're all within the line of sight where I feel really comfortable that they're working. And the data stuff is not that I feel uncomfortable, but it's the one that you really -- in this new world, data privacy protecting our clients' financial information is essential.

Got it. Okay. Last question here. You are 11 years into your tenure. And by anyone's measure, you've created tremendous amount of value for your shareholders.

Thank you. Great team.

How do you measure yourself from here? What defines success for you?

My goal when I -- I joined Morgan Stanley 2006, became President in 2007, then CEO a couple of years later. I always admire this institution. And nearly joined the M&A group back in 1987. And I went to the consulting path. But I always had great affection and respect for the brand. I got to know Parker Gilbert when he came to our business school, got to know him as -- in a small group that chatted with him for half an hour. I actually got to know him a lot after before he passed away, and wonderful man, after I became CEO. I felt this was an organization that did things the right way with really smart people. Like if you were smart, this was a great place to be. And they like working on complexity and they like working with good values, and that just resonated with me. So one of the things I'm hoping to do when I eventually leave is to have Morgan Stanley back in the light of which it was revered for most of its now nearly 90-year history. That's the simple goal. On sort of financial metrics and stuff, I mean, I think I've thrown it out that we'll be managing $10 trillion between wealth and asset management. We will, by the way. And we'll be doing 50 basis points on that, which is $50 billion in recurring revenues. Think about that. When I joined here, we were managing about $5 billion. I mean, it was a fraction.

Much smaller.

Yes. It was -- we're talking about trillions versus billions. So the excitement of what that can do, and at the same time, have one of the top 1, 2 or 3 investment banks in the world in every field we're in. The combination of those, I think, is a killer app. So we get the turbocharge in the investment bank with the growth embedded in the wealth businesses and asset management with the stability across all the fee-based earnings. So they're the 2 things that -- and obviously, transition it to the right team. But this place is an amazing culture. And I really believe that you can -- you need a strategy to set up success, enable success, but you need a great culture to keep the duration of that success. Because great cultures are what helps you recognize when you need to change your strategy. And great cultures is what keeps you disciplined to the strategy. So strategy first, then culture, repeat. And that's the path I want to be on for the next 20 years.

Great. Well, your enthusiasm is infectious in a good way. You're a few...

I've got such a huge live audience of 2 people here, but how can I not feed the energy off the crowd.

Next year, live, we'll have that crowd for you.

Yes, I look forward to.

But thank you so much for your time this morning.

Well, thanks for this conference. I saw the agenda and the speaker list, and it's absolutely a #1. So you embody the I just talked about. Smart, exceptional thinking, very client-focused, do the right thing, fabulous.

Well, thank you, James. And thank you, everybody.

Sure. Thank you.

We'll move on to the next session now.