Morgan Stanley (MS) Earnings Call Transcript & Summary

Okay, everybody. Thank you so much for joining us. And I want to just say I am so delighted to welcome Ted Pick, Chairman and CEO of Morgan Stanley back to the stage. Ted, it is an honor to be with you this afternoon to discuss your vision for the outlook for Morgan Stanley. Thanks so much for joining us.

The honor is mine, Betsy, the honor is mine. You started this 17 years ago, and here we are. So I appreciate you inviting me, and thanks, everyone, for joining us today. It will be fun.

All right. Great. Let's go. Let's kick off by talking about growth. I hear that with the Integrated Firm, we might be having an incremental level of growth versus without the Integrated Firm?

Well, I think that it's a pretty good time to be in the capital markets business. We're seeing in both of the businesses we're in, the Securities business, which is Investment Banking. And sorry, I turned my chair too much and one of my major shareholders is going to get like the side look. So I'm going to adjust now. And now I'm going to do the straight up look.

Do you want to swap with me?

I'm [indiscernible] between Betsy and Steve Wharton. So I'm going to do that.

We can swap Steve, Ted?

No, no, we're all good. We'll give each other look occasionally. But we're in these 2 major businesses where the TAMs are growing by 1 to 2x nominal GDP. We're in the Securities business, which is Investment Banking and Markets, and we're in the Wealth and Asset Management business. And to be in those 2 businesses and those 2 businesses exclusively makes life a lot more simple for us. We have a mantra around our core strategy, which is the first of our 4 pillars, which is we raise, manage and allocate capital, and both those businesses are trust businesses. And they're both really working, again, at the -- probably the higher end of the 1 to 2x GDP level. And the idea of the 2 businesses working together is this notion of the integrated firm, which we've been talking about for many years, but really put into motion over the last 2.5 years. And it's exciting to see it's in the bloodstream across the partnership. If I look at the Institutional Securities business, that first business, the Investment Banking and Markets business, we are in a moment when the life cycle of traditional investment banking business is actually coming to the fore, okay? We talked about this for years leading into the pandemic and then coming out of the pandemic and then there was the kind of the stack bubble and rates roofing and then it got quiet again. And now it's really happening. We're in an environment with real cost of capital, the challenges and opportunities associated with AI, the geopolitical reality. And the question becomes, well, what's Morgan Stanley's edge in all of that? And I think our edge is content, is content. I mean, 15 years ago, you and I were mired in the worst of this sort of this MiFID idea, which was sort of going to separate advice and research away from execution altogether. And Yes, that's a long time ago, but I see Katy here. She was covering Apple, and now she runs our Global Research department, amongst other things. And Betsy, you and I were together, and that continuity and delivery of content really matters. It really matters because when you have something that you don't know when it's going to come, it's sort of almost like the [ leniness ] thing where history, nothing happens and all of a sudden, a lot of history happens in a short period of time. We're in that moment with respect to the AI transformation effect. So we need to have the delivery of content in place. And I see it inside of the Investment Banking flywheel proper, where we are an advisor on lead transactions. We're, of course, seeing it in the mega IPOs that are beginning this week. We're seeing it also in the activation of the dormant sponsor community where there are the better part of $1,400 billion companies. You can discount that as you wish, but there are a whole bunch of private companies, well more than 1,000 that need to be harvested. You see it in the reality of strategics competing against that because, of course, these same sponsors have $1.3 trillion of dry powder. So there's a lot of core investment banking activity, which is accelerated by this AI phenomenon, which begins with the content that we delivered. What's most exciting today is that if I look at our markets business, once upon a time, better part of 15 years ago, coming out of the financial crisis, we came up with a 9-box paradigm in equities where we had cash equities, prime brokerage and derivatives. And the cash equities business was meant to be a barbell. Now we go all these years later. There are very few firms that on a global basis, whether you're in Hong Kong or in Paris or New York, you can actually prosecute enormous flow for market makers and hedge funds and the like. And we're one of very few. And then at the other end of the barbell, of course, you have the delivery of advice and high touch. Then you have the offering of leverage and financing relationships. That's prime brokerage proper. That's at an all-time high for us. And then the key is the derivatives product. The derivatives product is one that's really been invigorated over the last several years on the back of this content, which allows us to find asset managers, connect them with you to corporates who want to talk about ideas across asset classes. That involves a heck of a lot of organization, intuition. Time is the enemy. So when do you have the CEO, when do you have the asset manager. By the way, they're also now wealth clients. It's a super interesting time to leverage off of content, the integrated firm and this AI phenomenon to produce real outcomes inside of one box, which happens to be the derivatives box across the world. And if I go to the last piece of the ISG, our Institutional Securities business, I talked about our fixed income business, that has been reimagined into a business where we are a financier, a leading lender to sophisticated corporates sponsors that really want to know that we have some game intellectual capital about optimizing their capital structure, and we're a leading player with some of these alt managers, as you know, in that space. We've also continued to invest over the many years in commodities, and that's, of course, paying off today. And through some of the hard work that we did internally, we were able to -- in this moment where there's a bit of a regulatory normalization, we've been able to reset some of our derivatives businesses that were sitting in the Securities business into the bank. And that is something that dates all the way back to the GFC and it's something that puts us pari passu with others in the fixed income space like us. So in totality, when you look at Investment banking proper, the Equities business, the 9 boxes sort of on fire now and the Fixed Income business, I think it's fair to say that the Securities business, Investment Banking and Markets across the integrated firm is really humming right now. So that's the ISG story.

Near term, very strong.

Markets are obviously always the key variable when pencils down and there's -- you have an exogenous event. We've seen those. There's a period of time where pencils go down or it becomes very hard to manage -- for clients to manage risk and then have us work with them on that. Putting those periods aside, I think what we're seeing today, Betsy, is that the investment bank, again, Investment Banking plus markets is operating at a higher plane of performance. Now the goal here as a management team, understanding there is cyclicality in this business to the extent that you believe in economic cycles is this notion of higher highs and higher lows. That's very important to us. It's not so much that we can sort of on the blowoff stage, print the biggest numbers, but we have to have demonstrated operating leverage. That's why these last quarters have been so important, but that we're set up with enough of a durable franchise inside of the advice giving, inside of the lending, such that, again, we're going for the highest earnings multiple we can muster through the cycle that there will be higher lows when activities are quieter.

Excellent. Let's switch to...

What do you think?

Yes. No, it sounds like a good plan to me. And it sounds like one that you have articulated before and are now executing on that higher high, it seems like.

That's the idea.

Okay. How about -- let's shift to Wealth and Investment Management, where the question in the room is you're doing great with over $9 trillion in combined client assets.

Right.

So how are you thinking about that as you are just hairs breath away from the $10 trillion goal?

Right. So that's a bogey that we've had, as you say, the -- on our strategic objectives list that we would have $10 trillion across Wealth and Investment Management, $10 trillion plus. I think we are now at a stage where we can talk about $10 trillion in Wealth alone. okay? Now obviously, that is a function of market levels at a given point. But just the way the momentum continues to work its way through the funnel, that $9 trillion between the 2 businesses, $7 trillion and change and $2 trillion, I think I can imagine a world where in the fullness of time, we get to $10 trillion in the Wealth business alone, and we keep going. And that is a function of the success of the sort of the ingenious framework around the funnel. To remind people, the funnel really is the self-directed platform, i.e., E*TRADE, our Workplace product and then, of course, the 15,000 financial advisers. And if I had to pick 1 of the 3 pieces of the funnel to call out here, it would be Workplace. So Workplace we have seen $100 billion of new flows, we call them reinvestment flows go from E*TRADE or Workplace to the Financial Advisor last year alone. We've seen $400 billion move from E*TRADE or Workplace to Financial Advisor since 2020. That continues, okay? So the -- it's not just the net new assets that are coming into the funnel every quarter against an ever bigger denominator, but there's also just the reinvestment effect inside the funnel. And that's very exciting. And so the question is, what are we going to do with the funnel to sort of amplify the effect? And I think of one example would be that we go back in time and the other would be we go forward in time. The back in time is effectively -- and it's sort of relevant given what's happening this week in the IPO market is this notion of private companies. So in the Workplace space, as you know, we bank over 50% of the S&P. I was involved in a bake-off very recently for a large cap company. So it would be a takeaway of a public company. We'll see if we win. We hope we win, getting a lot of attention top of house. By the way, those existing public companies have $500 billion of unvested securities sitting in employee accounts. It's another 500 that we can naturally get after. But on the private company score, we're already banking 9 of the 10 unicorns. These are companies that we've been banking from the time that we hooked up in joint venture form with Carta to get a hold of their cap table. So we are already migrating with these companies as they go on the path to becoming public. And given that companies are staying public 2 or 3x longer, but in fact, are showing again, IPOs are back. and they are coming back in all kinds of shapes and sizes, it's a heck of a good thing to already be inside of the clothing of the company through the Workplace channel. So that's incredibly exciting. That links to the private asset space overall, our ability to market make and sit between the issuer and the investor. That was the raison d'être of the bolt-on equities transaction that we completed a couple of quarters ago, and the early returns on that are very positive, where we will not only have your full E*TRADE plus Workplace plus Financial Advisor kit for public securities, but we'll also be able to do so for private securities in a way that fits the advisory model. Then on the forward, say, okay, well, what's on the forward? The forward, and my guess is we'll talk about it later, is sort of digital assets that we are starting to think smart about digital assets. And that is important. Of course, even through the ups and downs, wealth continues to be generally underallocated to alts. So if you step back from all, I say holy smokes, you got the funnel regular way, but you're talking about privates, digital assets, alts and then AI enablement, there's a heck of a lot going on that will not only broaden but also deepen the funnel.

Okay. And that's all targeted towards Wealth that you just discussed.

Yes.

What about Investment Management?

Well, the IM business is a stable business where we have pockets of real strength in homegrown alts product in fixed income, in real assets, in liquidity. And then there's a gem inside of IM, which is this parametric machine, which has become the leading player in the tax optimization market. And that is really important to this notion of the integrated firm because it's not always going to be the case that every single part of the firm can work together all the time on an integrated firm basis because you need some church and state. But the reality is parametric is a perfect example of where IM can connect with our Wealth business and our Securities and Banking business. So it's been a huge winner, and it's exciting to see that become a vibrant part of the Investment Management business, which overall, we retain a lot of option value on. And given kind of how some of the names in the space have traded over the last 6, 12 months kind of come back to earth, there is a land of opportunity if we decided to go down the inorganic track.

Well, so let's talk first about how you are investing for all that growth that you just outlined. Are we at a spot where investments are moving higher or not?

I think that's a really important question, Betsy, because we needed to demonstrate operating leverage through this cycle. We needed to demonstrate that we could drive revenues at 1 to 2x GDP and that there'd be operating leverage that would be visible on the bottom line, which would adhere to this notion of a 70% efficiency ratio or better, which, of course, is just the reciprocal, one minus the margin, right? So that we would be able to, as an enterprise, generate 30% margins when things were good or even better at the enterprise level. And that's the notion of higher highs, and we've done that. And that's important for folks to see even as we carry excess capital. The question then becomes what about at the segment level? And I think at the segment level, when things are really working and ISG is doing its job of managing its capital allocation and banking the right clients and opportunities, and we're properly running our markets business, there should be manifestly operating leverage inside of the Securities business. There should be, there has to be, and there has been and there continues to be. Then the question becomes in the Wealth business, what are you really solving for? And I think what you're really solving for is to continue to drive net new assets into the funnel that they are fee-based flows. They are high-quality durable flows. They may be transaction-based in the early cycle, but as appropriate, they may migrate to the Advisor or they may migrate from somewhere else in the funnel to get to the Advisor. -- really important. And that the funnel becomes something that is friendly in a technology-forward context, which is why it's so important that we can be fluent on what we're doing in privates because obviously, there's some innovation associated with bringing transparency to the privates market and making it something that is user-friendly for the high net worth individual to have an allocation to. Same goes for alts. Same goes for digital assets. We're also looking to continue to expand the pie and draw in deposits and grow the thing. So I recall some years ago, as our owners do, that we were traveling in that segment well, in the low 20s margins. And then we went through a period where it was mid-20s margin. Then we went through a period where it was mid- to high and then high and then high to 30. And the moon and the stars aligned, and we hit 30 last quarter. Seasonality, great. I would think that the plan that we wish to pursue here for the next period is one where we're not going to manage to the margin, but to give a sense of the divisional outcome, that we'll be bouncing around that 30% number, okay? When there's seasonality, it's tax season. By definition, that means there's distraction because folks are focused on making the nut through the IRS, less activity with the FA to generate new P&L, but then you move to other seasons. I think that the bouncing around 30 idea is a nice breathe enough that you can invest in the businesses we're talking about, especially in AI-enabled businesses that we're going to talk about, but also hold some accountability to the overall firm efficiency target. And then with the fullness of time, because we want to outperform, right? You want to outdeliver over time. When the time comes, then we can revisit whether the range is higher. But this idea of bouncing around 30 feels right to me as a calibration of prosecuting the business, generating sufficient operating leverage at the firm level, but also not scrimping on the necessary investments we want to make around alts, around tax optimization strategies in parametric, around digital assets, around privates and around AI.

So one -- before we get to digital assets and AI, I do want to just ask about white space for growth in the 3 fleets, ISG, Wealth and Investment Management. When you -- you have talked about for many decades, white space is driving growth when you were running all these various businesses you ran before becoming CEO. As you sit and look at the 3 business lines, do you see any white spaces that we should be in that we're not?

Well, of course, one's perspective modulates a little bit when you're the principal. And I think we have sort of a paradox, and I think it's a good paradox amongst our senior management team, which is we have been successful as a firm in transformational M&A. Smith Barney, E*TRADE, Eaton Vance. We've been successful on bolt-ons. Mesa West, Solium, which became part of the genesis for having a leading stock plan business. And now we believe EquityZen. So against 3 transformational transactions and 3 bolt-ons, you'd say you're good at M&A, just do your thing. And I think there's humility that shared with Andy Saperstein and Dan Simkowitz, our 2 co-Presidents, who are the 2 co-heads of strategy and the entire management team that M&A in this industry is really challenging, and we want to get it right because the smallest transaction or something that has some appeal on initial headline can drag you down in a rabbit hole, especially if the regulatory environment gets tighter and you get distracted from the core strategy. The core strategy is one where we have 2 TAMs, the Securities business, Investment Banking and Trading and Wealth and Asset Management that are organically growing, again, at 1 to 2x nominal GDP and then are growing, I would argue, further because we got the integrated firm concept bolted down. So I would argue as a first answer and a continuing answer, we like the organic strategy. That having been said, it is the case that because we're in a deregulatory or normalized regulatory environment, we are very much keeping our eye on sort of competition and strategy amongst new entrants and the incumbents. Some of whom wish to go to other spaces, and it could be possible in a world where you have valuations start to move in different places for different participants that there could be some M&A activity in the space, and we want to be wide away to that. Now we're not going to -- one of the axioms in our place is we're not going to do strategy by [indiscernible] because we raise manage and allocate capital. And 3 years from now, hopefully, we'll be sitting here saying, we raise manage and allocate capital. That's what we do. We're not going to deviate from that. But is it possible that there would be places in the Wealth Management space where we could continue to deepen or broaden our already industry-leading position in the United States. I do believe that. Are there places around the world where we could potentially bolt-on strategies across the integrated firm? Perhaps. But rule of law, transparency, cross-jurisdictional regulatory environments, these are challenges. We can talk more about that, but that's part of the incremental hurdle of going outside of your home domain, especially in the times we live in. But to answer your question with some meat on the bone, I would say that I could imagine in the Wealth Management space and in some elements of the asset management space, although there in the classic asset management deal, personalities come together, comp plans come together, you pay for the talent twice, the incumbent is not so happy. These are things we all know, all right? So the question becomes, couldn't we just build it? And what's the rush? Let's just build it properly over time. But there could be a tool or there could be something inside of the Wealth Management business that Andy and Dan argue with the management team that would actually make us even a more robust competitor. And that's something we're going to continue to look at. EquityZen was relatively small, but that was having cataloged a whole bunch of candidates. And this is the one that we liked. I think there's a framework that's been inculcated in us that I think is an important one to sort of think about, which is strategy. What's the strategy? Do we have our strategy? What's Morgan Stanley strategy? Morgan Stanley's strategy is to raise, manage and allocate capital for institutions and individuals. That's the one sense. That's our strategy. Does this deviate from the core strategy? What's the culture? Our culture is rigor, humility and partnership and every single Managing Director of Morgan Stanley knows that, repeats it, and we try every day to live by that. Does the culture of the new player feel the same way. They're more entrepreneurial. We may be viewed as more bureaucratic. We're more regulated. They're more kind of free wheeling. Of course, you have to adjust for size and the journey, but does it work? Then comes, does the timing work? And then comes price. And I think that's that -- and you can debate whether it should be timing versus price or price versus timing. But I would argue in -- given what we've built and given what we know to be the last hard miles of integrating acquisitions, 5, 6, 7 years later, when the bloom is off the rose, and now you're with Morgan Stanley, how is it? And how is it going? And are we keeping share up? And are we making that brand? Are we preserving what we got and making it better, Ala, SmithFarney, Ala, E*TRADE. That question is one that we think about as we enter into potential ideas. So yes, there's some white space. Yes, we talk about ideas extensively. Yes, we're in a world now where our competitors have capital buffers and then there are new technology entrants, but we're keeping the -- it's a cliche say we're keeping the bar high, but we're living by that. But I would be remiss not to say there are opportunities that are coming at us, okay? And people have comparatively good currencies to play with. We're also keeping an eye, again, without doing the envy thing on what that player may be doing 2 seats down.

And we touched on a little bit just digital assets, which after 10 years of discussing and debating will it ever happen is beginning to happen. Is there...

Yes. All that -- you're early on that.

Is there anything there that would be...

I think there's something there, there now. I do think there's something there, there because I think what will happen is I think we all are living the reality that the traditional finance world and the digital world are going to start to -- they're going to start to come together. And at the individual level, the next generation is going to want to participate in both worlds. You can also imagine -- you can almost imagine like the idea of the prime broker to the individual. How do I optimize everything from your atomically movable cash through your entire asset allocation for you, your lifetime and the next lifetime. And it has to be done in a facile, technology-friendly way with all of the resiliency that a firm like Morgan Stanley brings, but then also leading to the delivery of financial advice. I think our view would be that we wish to be agnostic with respect to the old world or, I'll call it, loosely a DeFi world, certainly the digital asset world, where we want to be able to operate in both. Our clients they will want that. So we're anticipating that and you have anticipated that, and it's notable that you're going to spend time with Amy Oldenburg from our Investment Management business later today because there is an example where we now buy, sell, trade, spot. We built a wallet along with help from Zero Hash. So there's the ability to trade coin. But more importantly, there's going to be the ability with time to borrow and lend. That's the key that you can basically treat it as an asset where you can obtain leverage or it's just a natural part of your portfolio as a high net worth individual or as an institution, it takes time. There's all kinds of regulatory inconsistencies and trial and error and who's a player and who's not. And we ultimately, once we put our name on it, have to make sure that it works. So we've been aggressive in our thinking about the future, but we've been a little more pain staking in our execution. But now Amy is a perfect example, having launched an ETP and equity-treated product out of MSIM that effectively allows you to treat some of this product, I mean that is kind of a show on the Institutional side and on the Investment Management side that this is for real. We're doing it kind of on the Institutional side. We're also doing in the individual side and that kind of, again, Integrated Firm where digital assets, and again, Betsy, you were early on this, I think it's now coming to pass. And it will be a slow journey, but we're on the program. And at some level, we, as the wealth manager of choice and as a global investment bank, we're going to be increasingly agnostic with respect to how you hold your assets. We just need to be able to operate in both worlds, which I imagine a number of years from now, those worlds will not have a distinction.