Morgan Stanley wealth head sets eyes on trillions sitting in money markets

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Morgan Stanley sees huge piles of wealth sitting in money markets and high-yield savings accounts and wants to have a big part in managing it when falling interest rates undermine the appeal of those investments.

Money markets and high-yield accounts are just two sources Morgan Stanley is looking to as it pursues its twin goals of eventually having $10 trillion under management and a pre-tax profit margin of 30% from managing clients’ wealth and assets, according to Jed Finn, the recently appointed head of the firm’s wealth management business.

“We know that our clients are holding cash balances outside of Morgan Stanley, sitting in savings accounts, sitting in money market funds, getting a really nice yield while they’re waiting for a catalyst,” Finn said in remarks delivered on Thursday at Bank of America’s 2024 Financial Services Conference in Miami.

That catalyst for most investors, Finn suggested, will be falling interest rates. Though Finn said he’s not looking “to make a market call here,” many economists and investors expect the Federal Reserve to lower rates in a bid to avoid a recession.

The Fed itself has suggested it will reduce rates three times by the end of the year, bringing the benchmark figure down to about 4.6% from the current range of 5.25% to 5.5%. Such a move would exert downward pressure on the returns paid by money market funds and high-yield savings accounts, many of which have been hovering around 5%.

More than $6 trillion dollars are now estimated to be in cash proxies like money markets, which typically pay slightly higher rates than savings accounts. Getting even a piece of that total would push Morgan Stanley toward its goal of having $10 trillion under management, up from roughly $6.6 trillion today.

“I think everybody knows the story pretty well,” Finn said. “The highest yielding cash environment in 15 years has attracted clients’ excess cash.”

Cash competes with cash?

But Tim Welsh, the CEO of the industry consulting firm Nexus Strategy, questioned whether the small predicted decrease in interest rates would be enough to encourage clients to move their cash off the sidelines. He noted that one of the reasons investors are attracted to money markets is their tendency to be far more stable than stocks or other investment assets.

“Of course, cash used to be trash,” Welsh said. “But now that anybody can get a nice 4% or 5% yield, it’s going to take some very drastic moves to get someone to reallocate those assets.”

Peter Crane, the president of Crane Data and the publisher of the Money Fund Intelligence newsletter, said the main reason investors have been moving cash into money market funds hasn’t been fears of stock market instability. Rather, it’s because the yields on regular bank accounts have been hovering around 1%.

“It didn’t come from the stock markets, so what makes Wall Street think it’s going to go back into the stock market?” said Crane, whose firm tracks money markets.

“Historically,” he added, “cash competes with cash.”

Internal moves to fee-based accounts

Finn said further opportunities for boosting the wealth management bottom line lie right within Morgan Stanley’s own “four walls.” Another of the firm’s goals is to take assets now held in its brokerage channels, where they generate commission when bought or sold, and move them to its advisory channel, where they’ll produce steady fees throughout the year.

Finn noted that Morgan Stanley has several hundred billion dollars held in fixed-income brokerage accounts today “because of the fact that, historically, the yield environment didn’t justify the higher advisory fee.”

“We’re not in that yield environment anymore,” he said.

Cross-selling assets

Finn said Morgan Stanley sees other ways to boost its profit margins by helping clients do things like obtain home mortgages or invest in alternative assets like private equity and credit. Such opportunities for “cross-selling,” or offering the same clients multiple financial services products, was a common theme at Bank of America’s Financial Services Conference.

Speaking on Wednesday at the same event, Bank of America CEO Brian Moynihan said 150,000 of his firm’s clients in its Merrill wealth management unit — some of them coming from its Merrill Edge online brokerage — opened bank accounts last year. Moynihan said Bank of America still has “infinite room to grow” further in that direction.

“If you have a Merrill private bank customer who has a self-directed account, that should be a Merrill Edge account, not someone else’s, because we can give them better insight and information and capabilities,” Moynihan said. “Same if they have a bank account or it’s someone with a credit card and mortgage or a commercial loan.”

As for assets held at Morgan Stanley, Finn said about half of the $4 trillion overseen by firm advisors is now in accounts that regularly generate fees. He called that a “high-water mark” in the industry.

“We don’t know what the ceiling is,” Finn said. “We don’t know if it’s 60%, or 65%, or 70%. What we do know, though, is that there is still a significant opportunity within our own book to continue to migrate assets into advisory accounts.”

30% profit margin

Moving clients over into advisory relationships is one of the central pillars of Morgan Stanley’s plan to eventually hit a 30% pretax profit margin for its wealth and asset management business. That margin stood at about 25% for 2023, down from 27% for the year before.

Finn also acknowledged Thursday that the firm’s flow of net new assets under management slowed in 2023. Morgan Stanley’s net asset haul for the entire year was $282 billion. That fell a bit short of the more than $300 billion annual benchmark it had set itself on the way to reaching $10 trillion under management.

Morgan Stanley’s main strategy for increasing that flow, built through a number of acquisitions over nearly 15 years, is what it refers to as its “funnel.” The idea is to reach out to new clients with the self-directed accounts on offer through the firm’s E-Trade brokerage service or its Morgan Stanley at Work unit, which helps companies provide employee benefits.

As their investments accrue, the firm’s hope is that these clients will eventually be moved down the funnel into full-time relationships with advisors. The threshold for working with a financial planner is usually having $250,000 in investable assets.

Client conversions

Finn said the firm has enjoyed success with its Morgan Stanley Virtual Advisor offering, a call center for customers who aren’t yet working with dedicated financial planners. One goal is to increase the conversion rate for call-center employees, or the percentage of clients they are able to move over to the fee-based advisory accounts.

Finn said the best representatives at Morgan Stanley Virtual Advisor now are referrals to financial planners for 35% of the leads they receive on average. He said the firm had 14,000 such referrals in January alone, up from only 2,000 in the same month two years ago.

Finn called the firm’s conversion process a “one hop” system, because a call center representative still has to arrange to have a financial planner to reach out to a client prospect. Morgan Stanley is now trying to go “no hop.”

Some full-time advisors, he explained, have agreed to take questions about self-directed or work place accounts in the hopes of converting clients on their own. The fewer steps prospective clients need to take to enter into an advisory relationship, Finn said, the more likely they will be to sign on.

“One of the things we learned is that when someone’s ready to talk about their personal finances, or think about advice, or focus on their own wallet and think about it from all of your perspective, there’s a very short window when you have their attention, and then they go back to their day-to-day life,” he said.

AI at Morgan Stanley

Finn said technological innovation should also help boost profit margins. He noted that Morgan Stanley is in the third year of a partnership with the tech firm OpenAI — the maker of the large language model ChatGPT — and is now offering that technology to advisors as part of “AI@MS,” or artificial intelligence at Morgan Stanley.

One use envisioned for the near future would have the system “listen in” to discussions between financial planners and investors. In the end, it will produce a quick summary of what was said and put it into an email format that’s ready to be sent to clients following the advisor’s approval.

Finn said he thinks the system will eventually eliminate the need for “hours and hours” of administrative work.

“You can do things like put together a proposal, rebalance a portfolio, move money, create an infinitely detailed performance report instantaneously, and AI@MS will take care of all of that,” Finn said. “All of that is on the way.”

The day before, Moynihan said Bank of America, too, is looking to technology to help advisors operate at a lower cost. Noting that advisors now take in about half of the firm’s wealth management revenue — a model he labeled as “pretty efficient” — he said suggested technology could play a part in boosting returns further.

“That’s where Merrill Edge is important, because for small-balance accounts, we can serve them completely automatedly,” Moynihan said. “That’s where the centralized capabilities we have for home lending or other things, there’s a lot of incremental volume without much expense. And so we’ve got to keep doing that. But it’s still too paper-intensive, still too document-intensive.”

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