Morgan Stanley (MS) Presents at Barclays Global Financial Services Conference (Transcript)

Q – Unidentified Analyst

But before we begin, maybe just put up the first couple of ARS questions, like we’ve done for others? Just, what’s your current position in Morgan Stanley and then we’ll rank the companies at the end. And, I guess, Andy, as they answer, why don’t we just jump right in and maybe the best place to start is, maybe just talk at a high level of just what you’re observing in terms of the retail investor behavior and flows against the current backdrop?

Andy Saperstein

Yes, sure. So, thanks for having me here. So if you think of the retail investor and particularly, if you think about Wealth Management and what we’re — what particularly our financial advisers are designed to do, they’re designed to help clients think long term, think about their life objectives and what kind of — how they should set up their financial lives and their portfolios to help them meet those financial objectives.

So what you would hope our clients would do is, act rational during periods of volatility and during periods like this, where there’s a lot of market uncertainty, because the idea is to think through those market cycles. And that’s basically what you’re seeing from our clients.

If I had to use one word to describe our client behavior, I would call it rational. We’re obviously — we’re seeing some decreased level of transactional activity that’s come back a bit more recently. This is the retail investor. Cash has elevated levels. But nothing — but really nothing that I would say is either surprising or anything but rational if you have a market like this. The other thing that we’re seeing if I had to use another word I’d probably say opportunistic.

So what we’re seeing clients do is look for pockets of opportunities. So for example, areas where there’s dislocation in the fixed income market, single main fixed income, munis for a period of time alternative investments continue to be extremely strong.

Each of the last two years has been a record from the year before. Each of the first quarter this year was a record from the quarter before. That’s not surprising again, because you would expect clients to be looking towards alternative investments to further diversify their portfolios and look for non-correlated assets.

And any type of an asset that frankly is, I would almost call it a complex instrument like tax advantage instruments like Parametric which we got in the recent Eaton Vance transaction. Those are obviously very, very strong as well. So I’d call it rational and opportunistic.

Unidentified Analyst

Makes sense. One area a lot of questions on is NNA, Net New Assets. We hear a lot about — in Wealth Management, exceeded $50 billion last quarter despite volatility in the markets and client-related tax withdrawals think it’s a full $195 billion year-to-date. Kind of maybe what differentiates the platform and allows you to put up such big numbers?

Andy Saperstein

Yeah. And obviously the — our net new assets has gotten a lot of attention as it should, because that’s a measure of organic growth in — if you look at the last six quarters we brought in almost $650 billion of NNA. And like you say this year even in a difficult environment almost $200 billion in the first half.

So your question is the right one. So let me just take a step back. And the way we think about our organization, you’ll hear me say this probably a number of times today is we think of ourselves as a category of one.

And that’s by design that we’ve created that because, we don’t have a business model that looks like any other organization’s business model and our performance is very different. And where we’re capturing those flows, where we’re capturing that organic growth is also very different.

And we were very deliberate in, how we built out the organization this way. So the first thing if you go back to the first principle that we believe in Wealth Management is you need scale. And we’ve been saying that now for more than a decade.

And obviously with the Smith Barney acquisition back during the crisis we got our scale. And the reason you need scale is, because regardless of whether you have 500 advisers, 5,000 advisers or 15,000 advisers you still need to invest real resources in supporting those advisers.

You need sophisticated technology. We believe in a technology-supported adviser. You need financial planning. We have something called Next Best Action which is artificial intelligence powered tools for advisers.

We have risk-based technology that helps our advisers assess portfolio risk. You need specialist resources like alternatives and trust and estate and tax planning like I mentioned intellectual capital and so on and so forth. You need a great research organization. And you need this regardless of how many advisers you have.

So once we achieve the scale, we started to invest very heavily in these resources and that gave our advisers a real competitive advantage in providing advice to clients particularly during periods of lower volatility times where they’re focusing their clients on putting together a portfolio that can weather a storm.

So during times like these, you start to really see some benefits and that’s exactly what we’re seeing now because our clients feel very well – feel very well-supported. You’re seeing a lot of clients consolidate their assets with Morgan Stanley. You’re seeing a lot of prospecting activity during periods of volatility because clients elsewhere that either don’t feel like they were fully prepared for this type of a market or clients that weren’t getting advice during periods of low volatility are looking for an adviser. So you really start – what you start to see in the advice channel, you start to see a lot of activity, a lot of engagement. But then what really makes us a category of one comes to the two new channels that we’ve built largely through acquisition.

So first, we have to go to the workplace. We bought Solium. And then – which gave us a strong position in the workplace, which was then bolstered by our acquisition of E*TRADE, which of course strengthened that position because they had a very strong workplace presence as well. And of course the acquisition of E*TRADE gave us a leading position in the self-directed channel.

So if you look at across our organization right now, we’re – we have a powerful position in both – in the self-directed, in the workplace and the full-service advice channel. So what we like to say is that we have something for everyone. We can meet, regardless of your age, your level of wealth, your channel preference, the stage of your financial life. We can meet you where you are and where you want and we can grow with you over the course of your financial life. And that’s a really powerful place to be.

One thing that I should mention and maybe we can – we’ll probably talk about this a little bit more going forward is when you see the kind of organic growth that we have people always say so where is it coming from? Exactly where? This category on – the multi-channel approach that we have, there is no one channel. There is no one place that’s driving the majority of those assets. It is coming from so many different places. And we can continue because of our scale, we can continue to invest in the platform to make sure that while we’re delivering current performance, we’re also investing to make sure that we continue growth going forward.

Unidentified Analyst

And I guess how should we think about kind of a normalized level for NNA?

Andy Saperstein

Yes. So like I said, over the last six quarters, last year we brought in $438 billion of net new assets that equated to about 11%. We came out, we said, don’t expect that year-in, year-out. We – we’ve said – I guess there’s two ways that I guess you could think about a normalized level of net new assets which I’ll give you. First, if you expect somewhere in the neighborhood of 5% to 7% yea-in, year-out through a cycle you won’t be disappointed.

Another way of looking at it, and this is the way I do look at it because you can’t think about net new assets quarter-by-quarter, we may report net new assets on a quarter-by-quarter basis but you really can’t glean that much every single quarter because they don’t tend to come in that smooth. I think of it over multi years.

So if you expect that we’ll bring in about $1 trillion of net new assets every three years or so, that’s the way I think about it. I like to think about net new assets if I wanted to give you a normalization expect $1 trillion of net new assets every three years or so.

Unidentified Analyst

Healthy. I guess when you talked about this category of one, you obviously have the self-directed channel, this workplace channel. And it feels like, kind of, converting clients from those two channels so the advisory channel is just a huge opportunity. I guess, how are you approaching this? Can you do this today? Do you need to put more infrastructure in place to take advantage of this opportunity?

Andy Saperstein

Yes, that’s a really — that’s actually a really important question. So let me step back for a second and describe this. You probably heard us talk a little bit about the funnel, okay? And that’s a concept that we have where if you look back just a couple of years ago we had 2.5 million client relationships. They were all relationships that we had with full service advisers at the time. And so there was a wet signature for each of them when they became a client.

Now we have relationships with 16.5 million clients and that number is growing very quickly. And when people ask me, what are some of the metrics that I look at on a regular basis to manage the business? The number of relationships that we have and the growth of those numbers of relationships that we have that go into that funnel that is something that I look at on a regular basis because each of those relationships represents real opportunity.

And obviously right now a lot of those relationships are digital because they came in the workplace they came in the self-directed channel. And what we have is we have an effort going on which you described we call it Project Genome. And it’s a way of thinking about each individual client as an individual genome. You like to — hopefully you like a little term that’s the individualized DNA.

So the way we think about it is that it’s our job through technology, through deepening relationships with clients by every interaction with our client we learn more about the client. We can think about them as an individual. So if you think historically the way Financial Services has thought about clients it’s through segmentation which is a very rudimentary way of thinking about a client just broad brush strokes how many assets they have at the firm or by ICI numbers or things like that.

We want to understand we want to know each client we have as an individual through every touch point we have with them regardless of what channel regardless of how we interact with them and we want to build those trust-based relationships and deepen those relationships with those clients. So we can be there for them with the right product, the right service, the right level of information, the right intellectual capital, the right article, the right question at the right time with the right place with the right channel. This is something that is new in Financial Services.

It’s something that’s much more typically thought of in the world of technology and a lot of the new hires that we make come from outside the industry actually because this is something that can drive a lot of growth for us. So if you think about where a lot of the growth is going to come from in the future, it’s the 16 million relationships that we have and growing as we deepen relationships with them. Their lives are going to change.

Right now, we’ll serve them as they are. Their lives become more complex. They may need different products. They may need advice over a period of time. A lot of them may not. We’ll grow with them as they are and as they want and we’ll grow with them over time. So we always have something for them at Morgan Stanley.

The reason why I spent a little extra time on this one and I wanted to describe it in such detail and you’re right to ask about it is because if you think about this opportunity right now and the type of assets that we’re bringing in right now, this is in the early innings. This is something that we’re just beginning to explore learn about and drive. Over time, it will become a much bigger component a much bigger portion of our growth in our new assets. We’re only in the early stages of learning how to think about clients in this genome-type concept.

Unidentified Analyst

Got it. And then when we’re preparing for this we were kind of looking at market shares kind of across a lot of those businesses that kind of talk wealth management. And as big as Morgan Stanley Wealth Management is, you’re really small in areas like retirement solutions institutional consulting family office. Is there a reason – are these opportunities? Just kind of how you’re approaching that?

Andy Saperstein

So, let me take each of those separately, okay? Because each of them is a different opportunity and each opportunity has its own idiosyncratic aspects to it. So, we’ll take stock plan administration, which at the moment is the largest of the opportunities. And with that, we built out a strong position both as I mentioned through the acquisition of Solium and the acquisition of E*TRADE, both of whom had very strong stock plan administration capabilities. And the reason, why that’s important is the underlying, corporate the underlying client cares deeply about the technology that drives that stock plan administration.

The reason why it’s important for them and important for us is, because now we have access to those underlying employees at an important time in their lives, when stock vests. This is an important – in their financial lives, this is when they have a real decision to make. And they may need advice in making that decision. And we’ll be there. We have very strong financial education financial wellness resources. We have agreements with all of the underlying corporate clients that we have that they – as a client benefit we can reach out to these clients. We can market to them. We can educate them. We can throw seminars.

We can reach out to them both digitally and in person so we can help them shape their financial lives. And what we’re finding when we touch these employees is a lot of them have money need advice may or may not have known that they need advice, but would like to have financial advice, and didn’t either know that they could have access to a Morgan Stanley adviser, or didn’t know how they could get access to a Morgan Stanley adviser.

So we’re seeing a lot of interest from these underlying employees in the Morgan Stanley intellectual capital for sure. And also we’re making a lot of referrals out to our financial advisers, because these people are indeed looking for advice. And that’s something that’s starting to grow. And what we’re also finding is that, the actual assets that these investors have when they become full-service clients is somewhere in the neighborhood of nine or 10x, what the assets were that we’re vesting.

So the vested assets while attractive are in some respects the tip of the iceberg of what the actual opportunity is. And this again, is another early phase opportunity for us. This is – it’s still early days that we’re really building these relationships and deepening a lot of these relationships, similar to what I talked about in Project Genome. That’s – but it’s a real big opportunity.

Two other ones, I’ll just mention relatively quickly. First, you mentioned institutional consulting. What we’ve done is we’ve looked at different types of markets that are fragmented that in our view shouldn’t be fragmented. And the world of institutional consulting is a $50 trillion industry, which is extraordinarily fragmented. And if you think about it, there’s no great reason why it should be fragmented. A smaller — it grew up that way, but a smaller dispersed organization doesn’t have the product platform and doesn’t have the technology and the cybersecurity protection and all of the other things that you would expect that they would need to really compete in the world that we’re in today.

And we do. We’ve already built out that platform. There’s another added reason why the institutional consultant would want to be part of Morgan Stanley, which is again in their corporate clients they are the underlying employees, which we can provide financial advice, financial education, financial wellness, similar as we do in the stock plan administration and help them to develop retail relationships with those employees. So it’s an untapped — it’s another untapped opportunity.

We’ve begun the process, as I think you’ve noticed of, we’ve already purchased two relatively large institutional consultants and we’re still out there talking to many others, because it’s a right opportunity for roll-ups. And if you think about that underlying opportunity those two institutional consultants that we bought alone represent hundreds of thousands of relationships that now we’re starting to deepen.

And the last one just in speaking around opportunities, which are fragmented, but large opportunities is our new family office — our family office opportunity. We — basically this began as a joint venture with ISG, with our institutional colleagues. We took fund services. We invested in it to make — to create a technological solution that is very appealing to family offices. We can provide administrative services, like the consolidated general ledger to report on their holdings and their performance, which is extraordinarily attractive to a family office.

There’s never been a family office offering at scale that addresses their large pain points. Again, it’s another area that has been fragmented, but in our view shouldn’t be fragmented. And we’ve already brought in — we’ve announced $25 billion of assets into our family office, which is relatively new, but it’s going extremely well and there’s a long list of clients now waiting to get on to our family office offering, so lots of opportunity.

Unidentified Analyst

Great. I’ll maybe put up the next ARS question. Which of the following — I don’t have this is the next one. All right. We’ll go with this one. Which is the following would be needed to become more bullish on the shares of MS? And as they’re answering this, I thought that’s a different question, but I’m going to jump over to kind of Wealth Management pre-tax margin. You’ve talked to a 30% plus goal, I think, it was closer to 20% in the second quarter. What do you need to do to get to 30%? And given the investments that have already been made and the scale nature of the business, let me look at look out 10 years where do you think you can get it to?

Andy Saperstein

Well, two questions. So the first one is fun, because — it is a question I probably get the most, which is when we hit 30% margins. I like this question, because it allows me to walk down memory lane. When I first got to Morgan Stanley, we were in single-digit margins, and people asked if we could get to 10%. When we bought Smith Barney, there was many years where we’re trying to get to 20%, and now we’re talking about 30%.

Margins are effectively as you know a factor of the two things, which I’ve been talking about, which is scale and growth. We’re a scale player. We grow and frankly, margin is the output of all of those. So we’re confident, we’ll pass 30% margins in a way if you wanted to think about it. We could do it today. But what we do is we balance the investment in the platform, the investment in our business to make sure that we’re still building out all of those — building out all of the resources and capabilities that we need to grow over time and with current performance. So if I think about 30%, what I’m really thinking through is I’m thinking through 30% to maintaining our scale and just continuing to grow. Where it could be over time quite frankly is not something that I think about actively. What I’m really thinking about is continuing that growth trajectory that we have.

Unidentified Analyst

Makes sense. In Wealth Management, you talked about targeting full year loan growth of I think $22 billion. Deposits fell $12 billion in the second quarter. Can you maybe update in terms of what you’re seeing, how is the current economic backdrop impacting loan trends? And should we expect a further decline in deposits to mid higher rates?

Andy Saperstein

So we have seen some moderation in our loan growth. Rising rates have dampened the demand for mortgage that’s not a surprise to anyone. Depressed asset values impacted engagement in SBL. Again, not a surprise to anybody in the room. With that said, engagement remains strong. We’re still comfortable with the lending growth that we talked about of $22 billion in 2022. And with regard to deposit behavior and beta, those are expected to perform consistent with what we saw in the last rate hike cycle and consistent with — and it’s been performing consistent with our models. And overall, our goal is to make sure that we’re retaining overall assets at Morgan Stanley and it’s something that we’re focused on.

Unidentified Analyst

Okay. And I guess in near term I suspect lower asset values are impacting revenues. I guess, how correlated are revenues to the markets? And I know one of the earnings call Sharon pointed to $500 million of incremental NII over the next couple of quarters, albeit more so in 4Q. Is that enough to offset expected fee pressures?

Andy Saperstein

Wealth Management is a very resilient business. And this is another question that in some respects I enjoy because during bull markets, the question that I get asked most often is sure Wealth Management is performing well in bull markets, but how will it do when equity markets go down? Can it still perform well? And for many years, all I could do was make the promise that it would even in the face of that. We didn’t have anything empirical. Well, if you look at just this year, this year if I’m not mistaken, if you take the first half it was the worst first half of the S&P since I think 1970. The bond market was — we had a difficult period in the bond market, yet if you look at the performance of our Wealth Management business in the first half taking into account DCP which of course in down markets has a dampening effect on revenue, although no real effect on no material effect on PBT. We’re at or about record revenue PBT and margin even in a year where we had such poor equity market performance and bond market performance. So that should allay the concerns, that we’ve had over the years, if there were any anymore that Wealth Management is a very, very resilient business.

Unidentified Analyst

Got it. And I guess, at the top of the discussion, we’ve talked about the retail investor, but you’re also Co-President so maybe didn’t broaden out and get your perspectives in terms of, what you’re hearing and seeing from both the firm’s investing training clients, as well as kind of the investment banking clients.

Andy Saperstein

Sure, sure. So investment banking has remained muted through the summer. At some point, that will change. Markets will settle down and clients will transact, but that’s not imminent. Sales & Trading clients are engaged. We’ve seen decent activity continue into the third quarter, at least into the typical summer slowdown that you always see at the end of August. And — but across the board, what I would say is that corporates and investors are still engaged and we’re helping them really navigate this uncertain environment.

Unidentified Analyst

And I guess on the earnings call James, talked to — I made the comment, I think given the broader market uncertainty on an inflationary environment kind of an increased emphasis on discretionary spend. In light of the current backdrop, any update on the cost front?

Andy Saperstein

Yes. So, over the years I think as a management team, we’ve proven that we’re really disciplined on expenses and we take good care of our expense ratios. We’re still making investments as I mentioned several times, we’re still making real investments to provide for future growth. But we’ll remain disciplined both in terms of, expenses and capital deployment.

Unidentified Analyst

Got it. And it’s interesting. If you look at the moment Bank of America, Citigroup, JPMorgan are at or below where they need to be for CET1 for the first quarter. Goldman’s talked about wanting to move down a G-SIB bucket. Are there increased opportunities, for the overall firm to put its balance sheet to work? I know James has talked a lot about share buyback. Just how do you kind of balance the two?

Andy Saperstein

Yes. Yes. So, capital management is — we think of capital management, as much a part of our strategy as anything else and we’re very deliberate around it. Just as like I mentioned, just as deliberate as we are about expenses and the overall business and investments that we make. That’s the way we think about our capital deployment. We’ll continue our buybacks. They’re an important part of our multiyear $20 billion authorization. We doubled the dividend last year. We increased it by 11% this year. So that indicates, that the dividend is important to us. And our overall goal, is to maintain capital flexibility and continue to be prudent in the area.

Unidentified Analyst

Got it. And then you bought E*TRADE, bought Eaton Vance, bought Solium all you kind of mentioned. All the acquisitions seem to go well, brought a lot of opportunities. How do you think we should think about additional acquisitions?

Andy Saperstein

So, if I step back just around acquisitions. And yes, to your point, we’ve done very well with acquisitions. Smith Barney, gave us scale. Like I mentioned, Solium and E*TRADE really created — made us into a category of one by giving us that multichannel approach that we talked about. Eaton Vance, is giving us new capabilities and has really helped our investment management organization become much more diversified and all the acquisitions have done well.

What I tell folks is that to make an acquisition successful, you need three things and we had all three with the acquisitions that we did. The first one is there needs to be a real strategic reason for buying it. And I know that many organizations whenever they do it, they state a strategic reason. But you really need — it needs to fit within an overall strategy and we had that with each of the acquisitions that we did.

The second thing that you need is you need a strong culture. Acquisitions sometimes in my view that’s underestimated. Each of the acquisitions that we did there was a good strategic reason they believed in the vision and that work. But the thing that I think sometimes also gets underappreciated in acquisitions is how disciplined you need to be around process about integrating the organizations into each other. You need to fulfill the objectives. You need to effectively make those investments and stay focused on creating an integrated organization that allows you to do that.

So that to clients you create a unified client experience that makes them continue to look at you as one organization. And so when I talked about the genome and I talked about the funnel, they look at our different channels despite the fact that they came from different organizations. They look at that as one continuous client experience.

We’re — we’ll always look — we’re successful in acquisitions but it would have to fit those criteria. It would have to make sense. One of the things that I have been focused on lately and you’ll hear more about this I’m sure over the coming months and years is just as we’ve been successful in integrating acquisitions into our platform, we’re out there right now looking for a very innovative technology. And we don’t need to buy technology organizations.

We need to find technological organizations whether they’re fintech or whether they’re tech that can help solve problems that we have and help us move our organization forward in innovative ways. And the trick to that is not only finding the right type of organizations but like I mentioned in the scheme of acquisitions being good at integrating that technology into your overall platform to again make it seamless. And if you can do that then you can really turbocharge the type of innovation that you’re driving across your platform. It’s something we are very, very focused around. And you may have seen I even created a separate organization within Wealth Management focused exclusively on this and we’re working very hard on driving that type of innovation. We’re engaged with some really exciting fintech and other tech-type organizations right now in integrating them into our platform.

Unidentified Analyst

Got it. And then your Co-President and Head of Wealth Management; Ted Pick as Co-President, Head of the Institutional Securities Group. Can you maybe talk about as these roles have evolved, how have you two work together in bringing the firm together?

Andy Saperstein

Look, the relationship across the management team, our relationship with Ted is one of the things that really in my view says we’re going to stand in part just as a culture. And it really is a major competitive advantage. The type of collaboration that we have, The type of collaboration that we have, the type of — the way in which we work together across the organization is special and it definitely results in real business. I already mentioned as a good example, the family office venture that we created which was a joint venture, leveraging their fund services organization and building it out to serve family offices in a way that no other organization could. Ted and I — just as an example, we meet together. We go and we visit corporates together.

We go in and visit clients together because, if for those clients to think of Morgan Stanley overall as an organization, that can help them in so many different ways, we can manage their stock plan. We can take them — we can take them public, we can manage their cap tables. We can raise money for them. We can — we have — a lot of them are already on our platform. There’s so many different ways, that we can touch and work with different corporate clients across all of the businesses of Morgan Stanley. And when you think about — when you think kind of broadly in that way and expansively, about how Morgan Stanley as one organization can serve clients overall, it opens up your eyes and it opens up the organization to many more opportunities for both deepening relationships with clients and also for doing more business.

End of Q&A

Unidentified Analyst

Great. On that note, please join me in thanking Andy for his time today.

Andy Saperstein

Thank you.