Morgan Stanley Wealth Management

Morgan Stanley Wealth Management Overview: On January 13, 2009, Citigroup announced that its Smith Barney unit would become part of a joint venture with Morgan Stanley, in return for a $2.7 billion payment from the latter, which would thereby obtain a 51% stake. The venture was called Morgan Stanley Smith Barney. It was renamed Morgan Stanley Wealth Management in September 2012.

In September 2009 it was announced that Morgan Stanley was exercising its option to buy out the remaining 49% stake held by Citigroup. By early September 2012, Citigroup was valuing the joint venture at $22.5 billion, while Morgan Stanley was ascribing a $9.5 million value to it. On September 11, 2012, the two sides settled on $13.5 billion, much closer to Morgan Stanley’s figure.

Under the new valuation agreement, Morgan Stanley will increase its ownership stake by 14%, to 65%, sometime before the and of 2012, paying $1.89 billion (14% of $13.5 billion) to Citigroup. An additional payment of $2 billion (15% of $13.5 billion) will be made by June 1, 2013 to boost its ownership stake by another 15%, to 80%, subject to regulatory approval. The new target date for completing the sale is June 1, 2015.

As a result of the valuation change, Citigroup will incur a $2.9 billion after tax reduction of earnings in the third quarter of 2012. Citigroup had carried its share of Morgan Stanley Smith Barney on its books at $11.3 billion (49% of $22.5 billion), but the new agreement slashes the value thereof to $6.6 billion (49% of $13.5 billion), a $4.7 billion reduction before taxes.

Management has been pursuing a goal of reducing expenses by $1.1 billion, or 15% (financial advisor compensation is excluded from the calculation).

Size at Formation: Key combined metrics on this joint venture as of the time of its announcement were:

  • Financial advisors = 22,559
  • Worldwide offices = over 1,000
  • Client client assets = $1.7 trillion
  • Client households= 6.8 million

Current Size: By mid-2012, the size of Morgan Stanley Smith Barney had drastically declined from the original figures cited above. The new figures are:

  • 16,934 global representatives (financial advisors)
  • approximately $1.709 trillion in client assets

The firm remains first in the industry in the number of financial advisors, but #2 Merrill Lynch is close behind at 16,151.

Breakdown of client assets by household assets in custody with Morgan Stanley Smith Barney as of 2011:

  • $539 billion from client households with $10 million or more
  • $735 billion from client households with $1 million to $10 million
  • $397 billion from client households with $100 thousand to $1million
  • $38 billion from client households with under $100 thousand
  • $509 billion in fee based accounts
  • 804 global retail locations (down by 77 from June 30, 2011)
  • Annualized revenue per financial advisor = $785 thousand
  • 62% compensation to revenue ratio (all employees included, not just financial advisors)
  • Client assets per financial advisor = $97 million

Banking Services Change: The banking services associated with the central asset accounts offered by Morgan Stanley prior to the combination with Smith Barney were provided by JPMorgan Chase. These included, primarily, the checking accounts and debit cards (which also can access ATMs for cash withdrawals) attached to these securities accounts. In 2011, former Smith Barney client accounts had these banking services migrated from Citigroup to JPMorgan Chase, in order to combine all Morgan Stanley Smith Barney clients on a common banking platform. This represents a loss of check processing fees and debit card transaction fees for Citigroup on the former Smith Barney client base. However, former Smith Barney clients continued to have Citigroup provide interest bearing deposit accounts attached to these central asset accounts, for sweeps of cash balances.

Positives: Morgan Stanley is one of the most respected old-line names in investment banking. It became an integrated financial services firm by merging with Dean Witter in 1997, which added financial advisory services (securities brokerage) and asset management capabilities.

Negatives: Morgan Stanley Smith Barney experienced a net decline of 644 financial advisors from the launch of this joint venture in 2009 to 2011 (source: “Wall Street Wielding the Ax,” The Wall Street Journal, June 29, 2011). However, compared to the combined number reported at the time of the joint venture’s creation, the figure was down by 4,921. Additionally, Morgan Stanley as a whole is committed to reducing expenses by $1 billion a year through 2014, which inevitably translates into significant staff and compensation cuts. Another indication is the reduction of retail branch office locations from over 1,000 at formation to 804 as of June 30, 2011.

All key metrics, pretax profit, revenue and client assets, for Morgan Stanley Smith Barney have declined since 2008, the baseline year for the deal. In particular, pretax profits in 2011 were still only about half the 2008 figure.

Morgan Stanley’s new so-called 3D brokerage technology platform has drawn heavy criticism from financial advisors, support staff and clients alike for technical glitches and user-unfriendliness. Various reports indicate that this has spurred client and advisor defections, and also lawsuits threatened by advisors over lost business due to it. Financial advisors and clients who were converted from the Smith Barney technology platform in July 2012 appear to be especially unhappy.

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