Morgan Stanley (NYSE:MS.PK) Bernstein 38th Annual Strategic Decisions Conference Call June 13, 2022 11:45 AM ET
Company Participants
Jed Finn – Head of Corporate & Institutional Solutions and Chief Operating Officer of Wealth Management
Conference Call Participants
Unidentified Analyst
Okay. Thanks, everybody. Appreciate you coming here for our Morgan Stanley Financials Conference. I do have a quick disclaimer read. This discussion and the one with James Gorman later today may include forward-looking statements, which reflect Morgan Stanley management’s current estimates and subject — and is 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. It is not an offer to buy any security. All right. Thank you, everybody, for joining us.
I’m thrilled to have with us today, A – Jed Finn. Jed is COO of Wealth Management and Head of Institutional Solutions at Morgan Stanley. Jed, thanks so much for joining us. Jed will be going through a presentation followed by some Q&A. So looking forward to hearing Jed’s thoughts.
Question-and-Answer Session
A – Jed Finn
And so I will cover 3 topics in addition to another disclaimer. Number one, a quick recap of that strategy; number two, I’ll touch on the magnitude of the opportunity in front of us; and then three, I want to share some of the learnings that we’ve gained over the last 18 or so months that we’ve officially been at this since the close of the E*TRADE transaction.
And I just want to underscore upfront that those learnings are important for 2 reasons. Number one, the fact that we can quantify at a detailed level, what’s working and not working as we seek to migrate these clients to advice relationships demonstrates the power of the integrated data platform that we have built, and it is live now, and it underpins all 3 of our channels.
And it at least gives us confidence that over time, we’re going to be able to turn those dials to drive more and deeper relationships. And then number two, as you’ll see when we go through the material, the learnings that we have provide a very clear road map as to where we need to invest.
So to those of you who have asked us where we’re focused in the coming weeks and months and years, it should be quite apparent. So with that, let’s dive in. I’m going to try not to walk in front of you.
Q – Unidentified Analyst
That’s okay.
A – Jed Finn
I want to start by just contextualizing this entire discussion within the journey that we’ve been on in Wealth Management over the last decade or so. And conceptually, the way we think about where we are today is we’re just entering our fourth phase of growth.
Phase 1 was about building the scale that’s necessary to compete effectively in this industry. and it required pulling off the largest integration in wealth management history. It took several years, it took a lot of effort. And those of us who were here and I see a number of my colleagues in the room, we’re also wearing the scars from that effort, but it was worth it. Phase 2 then was executing against our belief that the winners in the space would be those firms that could combine best-in-class advice with best-in-class technology and do so at scale. While a robo only solution has its place, we never thought it was going to take meaningful share because at its core, financial advice within Wealth Management is a deeply personal and an emotional piece of advice. And so we never thought it was going to ever be automated away.
That said, at the time, back in 2016, it was very clear to us that technology was going to become an increasingly important enabler for how our advisers deliver that advice. And so we invested behind that thesis. And a number of you who are in the room today were also here in 2018, where we ran our Expo 1.0. It was our technology expo, and it was designed to demonstrate some of the unique capabilities that we had built, things like Aladdin for Wealth Management and Next Best Action and GPS, which is our goals planning solution that seamlessly integrates the planning piece with the portfolio construction piece so clients and advisers have no friction in terms of implementing those plans.
All of those tools were unique then 4 years later, they’re still unique and they’ve been a big driver of our outsized growth over the last couple of years.
Phase 3 then was about expanding our acquisition and our service channels beyond the traditional financial adviser to include the workplace and digital direct. And this was really important for us because it gave us the ability to meet clients where they are in their wealth journey.
Regardless of where you fall in the universe of advice consumption preferences, whether you’re a soft directed investor just starting out or you’re a sophisticated family office who wants blended retail and institutional coverage, we have a solution, I would argue, a best-in-class solution that can meet your needs.
And so now on Phase 4, which is taking all the capabilities that we built in Phase 2 and combining with all of the channels that we got access to in Phase 3, and now delivering an integrated client experience where we seek to deepen relationships across every single touch point, that is where we are focused on deepening those relationships.
A number of you have heard us talk about Project Genome, which is our AI-based client engagement engine that’s designed to provide the right offer to the right client at the right time, again, to help achieve their wealth management goals, but also to deepen relationships.
Earlier this year, we introduced a new retention metric that allows us to track how effective we are at retaining shares in cash post the vesting event. We’ll focus there, not because of the incremental economics that are associated with those balances, although there are some, but the longer the money stays in the building, the easier it is for us to deepen client relationships.
And if you take a step back beyond the work that we’re doing now to convert the E*TRADE back office onto the Morgan Stanley back office, which we need to do for big scale and efficiency benefits, any other investment that we’re making in the space is, again, to deepen client relationships.
But it’s probably difficult for those of you who are not in the weeds every day, which is hopefully all of you to understand how all the different pieces come together. And so we’re taking a page out of our 2018 playbook. We’re running Tech Expo 2.0.
We’re calling it the Connected Client Journey, and it’s a multimedia experience that’s designed to allow all of you to follow different client personas as they interact with the Morgan Stanley platform to achieve their wealth management objectives.
It’s downstairs right on the lobby level. Each journey is 8 minutes, so it’s not a massive time commitment. And we would strongly urge you to check it out either during a break or before or after because it brings to life all the things that we’re doing and the key takeaway, which I’ll just tell you upfront is it’s designed to show the power and the distinctiveness of bringing all of these capabilities together under 1 roof.
So let’s dive into Phase 4 and our acquisition funnel. Many of you heard us talk about this in the past, and some of you have heard it many times, but we keep coming back to this because it is the simplest articulation of the strategy that we are pursuing, which is we’re building a massive asset acquisition funnel that starts either in the workplace or with the self-directed investor but is ultimately designed to end up in a full-service advice relationship.
And we think of it as having 3 steps. Number one, we want to maximize the number of potential clients that we put in the top of the funnel, and we do that through either winning new B2B mandates or through attracting self-directed investors to the E*TRADE platform. That’s why we’ve leaned into the E*TRADE marketing effort you saw at the Super Bowl. We even brought the baby back.
Step number 2 is then building trust and credibility with those potential clients, and we do that by giving them access to Morgan Stanley resources and training and education content and even tools and analytics, all delivered through our financial wellness platform.
The goal in this step, and this is important because we’re going to keep coming back to it, is to make them feel like they are advice clients even before we get to step 3, which is the actual migration into an advice relationship. And the way we do that is by connecting the right client with the right adviser at the right time and positioned in the right way. And that’s a very important point, which I’ll touch on shortly.
But we also recognize not every client is ready for a full-service relationship right now, and that’s okay. Because of the capabilities we’ve acquired, we can happily set them up with a self-directed solutions and then grow with them over time.
The other key point of strategic differentiation that’s important to understand is the uniqueness of our B2B strategy here, which is the first step in that funnel, if you recall. And the punch line is we are the only firm who would argue that can deliver cradle-to-grave corporate services where we grow with a company at every phase of their own life cycle.
When it’s just a couple of folks in the garage, we can put them on Shareworks private, which is essentially a self-service cap table management solution. When that private company becomes more complicated and their needs get more sophisticated, we can put them on the Shareworks private platform, which is our main private markets capability.
And that allows them to do things like track different share classes, track different voting rights, even facilitate liquidity transactions, things like tender offers, controlled trading platforms or programs and auctions. And what we’ve already done, and this is live is we’ve connected the tender process to the E*TRADE account. So when a company goes through a tender event, the employees and early investors tender their shares, that cash drops into E*TRADE account as net new assets.
But again, back to the theme, more importantly, it allows us to build a wealth management relationship with them before the big liquidity event of going public. When it’s time to go public, we’re obviously associated with a world-class investment bank that can easily manage that transition. On the workplace side, we can seamlessly switch from private cap table manager to public equity plan admin, and then we can provide a number of services around that event.
DSP, which is the directed share program, we have friends and family programs that a number of these offerings have. We can do the 10b5-1 for executives. We can advise on the 401(k) plan and the investment options. We can manage the corporate cash. We can deliver financial wellness and we can manage the individual wealth of the employees up to and through retirement.
And the reason why we believe this is unique is several fold. Number one, because we’re delivering every single sleeve, we can be very price competitive as we’re competing for any individual piece of business.
Number two, from a corporate buyer perspective, the process is really easy because as they grow, they simply flip on new services. And remember, a lot of what we’re talking about here from the perspective of the company is not a core part of their strategy, meaning Uber is not a better mobility company because Shareworks is administering the equity plan, it just has to work.
And if firms like that can partner with the firm, with the brand and scale and credibility and resources of Morgan Stanley, then that buying experience becomes very comfortable for the CHRO or the head of benefits, or the CFO or whomever is actually doing the purchasing.
And then third, the last reason why we think this is unique, and this is probably the most important is the fact that from a client perspective, everything is integrated because it’s all within the Morgan Stanley ecosystem.
So if you are an advice client and you have a self-directed account, and you work at a company where Shareworks or Equity Edge is administering the equity plan and you have assets held away, we can ingest all of that data in real time on the Morgan Stanley portal. And then as a client, you and your adviser can interact using the tools that we’ve been talking about. It just gives you a very different picture of your finances and your ability to scenario plan to meet your wealth management objectives.
So let’s switch gears now and talk a little bit about the magnitude of the opportunity. And the key point here is that we have dramatically scaled our footprint over the last several years. For those of you who’ve been following us for some time, you recall in just 2019, we talked about the fact that we had $2.5 trillion in assets here and $2.5 trillion in assets away. And what we used to talk about was we could double the size of our asset base without adding a single new client relationship. And the focus there was on consolidating, right? We wanted to be the quarterback of the relationship.
We’ll fast forward now to 2022. And as a result of the capabilities that we’ve built and the capabilities that we’ve bought and the consolidation that we’ve effectively delivered, we’re now sitting at just shy of $5 trillion in assets. But that’s now held by 16 million participants who are holding $10 trillion in assets away.
So $5 trillion here, $10 trillion away, despite the fact that we’ve enjoyed this growth, we can now triple the size of the firm without adding a single client relationship.
And the second point on this slide, which I’m sure you picked up just by looking at it, is the fact that the number of clients is growing faster than the total assets held away, which implies the marginal clients’ assets are lower than the average of our client on the platform. That is absolutely by design.
A core part of the strategy is to build relationships with clients who are earlier in their wealth accumulation journey and then deepen those relationships over time. So what we’re talking about with this pool is not just a source of immediate flows, but a pipeline in the future that’s going to continue to grow as we grow.
And what we’re talking about in all of the gaudy numbers on the slide just represent our existing client footprint. If you look at the opportunity in the market more broadly, we have significantly more room to run. I’ll let you digest this page for a second.
This shows the market share that we have within a number of the workplace businesses in which we compete. And while we have a leadership position on the stock plan side, with about 50% of the S&P on a market cap-weighted basis, we are just getting started in our share capture journey in some of the other businesses.
On the retirement side, where we advise companies that could range from small businesses all the way to large corporations around 401(k) plan selection and investment option lineup, we’ve essentially rebuilt that platform over the last couple of years to make it easier to engage with the participants and to provide education to those participants.
We’ve also established some co-branded relationships with — which I’m sure some of you read about, which ensures that when that employee goes to the record-keeping site, what they see is the Morgan Stanley brand.
Again, back to our strategy of making clients feel like their advice clients even before we get to that advice discussion. On the other institutional consulting businesses, where we provide advice to Taft-Hartley plans or foundations and endowments. We’ve invested in home office professionals who can deliver best-in-class intellectual capital. We’ve invested in tools and analytics. We’ve added our research capacity. All to help those consultants deliver better advice to their clients.
On the family office front, we’ve taken our fund admin platform from our institutional partners. It sits within prime brokerage in the equity admin or in the equity division, and we’ve adapted it for the family office. And as a result of that, we’ve taken the family office business from a standing start 2 years ago — 2.5 years ago, to over $25 billion in assets today.
But what’s more exciting to us about that is the pipeline that we have is a multiple of that number, held by families who we’ve already had that introductory conversation. There is big demand to take advantage of that adapted fund services platform and sit on a single contract on a single platform, but yet coverage from both institutional expertise and retail expertise, which is uniquely something that Morgan Stanley can deliver.
And then finally, on the non-qual deferred comp side, where essentially nowhere right now, but it’s up on the slide because it’s an area that we are very interested in. And that has some benefits for us for 2 reasons.
Number one, our clients are asking for it. A lot of companies want to have a non-qual plan that sits alongside an equity admin plan. So there are embedded revenue synergies.
But two, the leakage to wealth management is incredibly high. The participants in those plans are senior executives who tend to have a lot of money and the decision about how much to defer and how long to defer it for practically requires a detailed financial planning conversation.
So stepping back from all of this, the opportunity within our existing footprint is significant. Again, we can triple the size of our asset base without adding a single new client relationship. And the opportunity in the broader industry is significant, as you can see by all of the room that we have to run from a market share perspective.
And that’s why we’re so enthusiastic about the road ahead. And that’s why we say back to that first slide, we are just starting our fourth phase of growth. We’re in the very earliest stages.
So now let’s talk a little bit more tactically about how things have gone and what we’ve learned. And obviously, it’s early days. So the base that we’re starting from isn’t massive. And yet, we have enjoyed significant growth. And you can see that from the size of the multiples on that page, between 2019 and 2021 at each step in the funnel.
And again, that’s what’s represented there. On the B2B side, that first step in the funnel, we’ve more than doubled the number of new client wins from 2019, and that’s a pro forma number, so that includes the performance of E*TRADE.
Having 2 leading equity plans under one roof means we’re essentially a required invite to the RFP process. And then when you add on top of that, our wellness platform and the broader resources of wealth management, and the pre-existing relationships on the institutional side, what you have in our ecosystem is a growth accelerant.
But what’s more important to us than the number of plans, obviously, is the number of participants. And in 2021 alone, we added 700,000 new participants to our equity plans. Just to put that number in perspective, 2 slides ago, we talked about the 2.5 million total client relationships we had in 2019.
That’s after 40 years of growth from this firm and its predecessor firms. We added almost 30% of that in a single year. We added 200,000 new participants in the first quarter of 2022.
We’re talking about a very different ZIP code in terms of our growth trajectory. And the second step of the funnel in terms of building trust and credibility, we’ve seen a big uptake in financial wellness, both in terms of number of mandates and in terms of number of participants.
And right now, what we’re focused on is experimenting with a range of different tactics to better educate and better engage with those participants and I’ll talk about that in one moment.
But despite the fact that this entire effort we’re still in this test and learn phase, the contribution from this to our overall flows has been meaningful. That 5x you’re seeing in the third part of our funnel in terms of migration to advice, that’s associated with a double-digit billion, a comfortably double-digit billion number of flows into our reinvestment households.
And let me explain what that means because some of you may not be familiar with the term reinvestment. If you’re a first account Morgan Stanley comes from the workplace and you’re part of a stock plan at a company, and then you meet a financial adviser and you open up an advice relationship, we classify you as a reinvestment household.
And the notion there is you’re taking the assets that come off of a corporate plan, whether it’s a stock plan or a 401(k) plan, and you’re reinvesting them into a personal asset allocation portfolio designed to help you achieve your financial goals.
Well, it turns out, and this is positive news, the term reinvestment is a bit of a misnomer because only a small percentage of that comfortably double-digit billions of growth actually came from a corporate plan where assets have already invested, and we just put in an advice wrapper around them. Only about 10%, 90% came as net new assets to the firm.
And so if you extrapolate that more broadly, you’re familiar with the fact that we report several hundred billion in unvested balances every quarter. What that means is that represents about 10% of the immediate opportunity that’s in front of us. So it is a tool not just to recapture what’s best but to build enduring wealth management relationships where we can consolidate clients’ positions from afar.
So obviously, we’re very excited about what we’re seeing from an early reads perspective. And so given the success, the obvious next question is how do we keep it going, how do we accelerate it, particularly since as we all know, the earliest fruit is often the lowest hanging.
And the answer is pretty simple. We’re going to invest behind what works. And this last slide is going to get into the weeds. So bear with me, but it’s the last slide. Let’s talk about that. Let’s take x as our baseline conversion rate, meaning less let x equal the percentage of leads that become full-service advice relationships when we simply distribute those leads out to financial advisers as soon as we have the appropriate permissions in place from the company.
That was our original approach. But it turns out, if you send out a bunch of leads and an adviser calls a participant 3 weeks before investing event and says, I’m from Morgan Stanley, and I’m here to help. The conversion approximates that, which you would expect if you just dialed the phone book.
For starters, a lot of those clients at the time didn’t even know they were clients of Morgan Stanley, and we since addressed that, and you can go directly to those websites to see all of the branding we do around Morgan Stanley at work.
But also they don’t know that the person calling them as a leading financial adviser in the industry who’s been hand selected by Morgan Stanley to represent the firm and our capabilities and our ability to deliver wealth management.
They think they’re being called by a call center. So as you can imagine, x is not a very exciting number for us, let’s call it, low single-digit percentages. So we paused the lead distribution, and we took a step back until we could build and implement a much more comprehensive participant warming experience, and we’ve done that. It’s live.
So now when you join a platform that Morgan Stanley at work is administering you get a welcome e-mail that sets your expectations around what a relationship with Morgan Stanley looks like. And monthly, you get a newsletter where we pull from our content library.
In April, it was about tax-efficient investing. It gave us the opportunity to bring Parametric capability into the discussion with those clients. There are also trigger-based campaigns. So when a new award shows up in the system where when you have a new investing event coming up, we have the ability to send you an e-mail.
And across all of those different touch points, we’re messaging around what being a Morgan Stanley client entitles you to receive and the value of our financial advisers. And there’s even a button on those e-mails that you can click on to schedule a complementary portfolio review. And so when we put these participants through this experience, as you can imagine, x grows and becomes 2x.
And that’s just at the beginning. Again, we think we’re going to get better at matching that right content to that right participant at the right time. So we expect that to increase. But in terms of where we’re focused, where we want to put every single participant through that warming experience, and that’s what we’re doing this year.
Next, we looked at corporate events. So what is a corporate event? Think of it as any time where we can engage in real time with a participant leveraging content from Morgan Stanley’s library. So seminars, webinars, office hours, we’re even in discussion with some of our clients to put a branch on site because corporations are incredibly focused on their employees’ well-being right now.
When someone goes to an event, it turns out that there is real value in getting people to take a step back and focus on their financial picture. So when they go to events and when we connect them to a financial adviser, x becomes 7x. So what are we doing?
We’re scaling the number of events that we run. We expect to run 30% more events this year than we did last year. Next we looked at referrals from relationship managers or RMs. And those are the folks in the call center who are servicing calls that could range from user name and password questions all the way to the tax consequences of exercising options.
And what we’ve done is trained a handful of those RMs on how to engage the participant in a wealth management discussion. And if appropriate, refer them to a financial adviser.
When that happens, x becomes 10x. Now obviously, there’s some selection bias here because we’re only referring to people who actually raised their hand. So it’s a friendly denominator, so to speak.
But it’s still a very potentially powerful source of new flows and new referrals because right now, only a very small percentage of our RMs are trained. We expect that to get to 100% by the end of this year.
And then the last thing we looked at is the same full process but with our executive RMs. And these are the senior service folks who are paired on a one-to-one basis with the top executives at the clients, providing white glove dedicated coverage. And what we did is we paired a number of those exec RMs with our private wealth teams to test whether a relationship between the PWA, our private wealth adviser, and the exec RM, and then the relationship between the exec RM and the senior executive, which sometimes last for several years, could combine to drive more throughput in terms of advice migration.
And I’m sure you can guess, based on the way the page is set up, that the answer is it did, and that’s 15x. So what are we doing? Well, we’re expanding the exec RM coverage model. So I know I’ve blown through the time. So let me just take a step back.
Obviously, what we’re talking about here is a significant amount of execution in the coming weeks and months and years. We’re talking about people. We’re talking about technology. We’re talking about changes to our operational processes. And importantly, we’re talking about a risk and control framework that oversees all of this and ensures we are appropriately discharging our guardianship chip and regulatory responsibilities, but we’re committed to staying this course because we believe in the upside.
The opportunity, as we’ve talked about, is significant. The early results are incredibly encouraging, and we are confident that this effort is going to become an increasingly important contributor to the growth of wealth management overall. So with that, I will pause, and we can do Q&A.
Question and Answer
Q – Unidentified Analyst
We have time for 2 quick questions.
A – Jed Finn
I really must have blown through it.
Q – Unidentified Analyst
First question is just on how you’re driving this. You talked quite a bit about training the existing force as well as bringing in new talent. Could you talk about the tech stack side of the platform here to drive growth. How fully baked is it? Is it partially done or fully baked? And if partially, how long to be fully baked?
A – Jed Finn
Yes. It’s a very important question. And I don’t think any of us would ever say our tech stack is big. There’s too much going on and too much to build.
But conceptually, the way that we think about it is really across 3 horizons. There’s the technology that we’ve already built that we want to continue to differentiate from others and take the feedback from all the use cases. So that’s the mature tech that we want to continue to put white space between us and our peers around.
And in that category, I would put all of the modern wealth toolkit back from Expo 1.0, and there are some tweaks we’re making, for example, even this year to the planning capabilities that we think will be really unique, particularly at the high net worth side.
Then there’s the tech that we’re about to launch. And a lot of what I talked about here falls into that category. So one of the things we’ve already done is connected the E*TRADE account to Shareworks so that from Shareworks participants, when those shares vest, they automatically dropped to a participant account.
I think we shared a metric of getting to 90% by the end of the year, and we are on track for that metric. Also in that category, I would put our project genome, which is the engagement engine that looks at all of the different interactions that a client has with the platform and figures out how do we render pages and construct an experience in real time that best helps that client meet their wealth management goals.
And that’s kind of about to be released and some of it is released. So that’s horizon number 2. And then horizon 3 is making sure we’re still being innovative. And we’ve had a number of very interesting conversations with emerging big-thinking fintech firms and general tech firms to figure out how can we take just some of the innovation that’s happening, not inside of Wealth Management, and deploy it to help our advisers better serve their clients.
And so we’ve got active efforts across all those 3 phases and probably saw we released a new innovation engine in Wealth Management to help deliver against that.
Q – Unidentified Analyst
So we have time for one more question, which is on how do you think about bringing in the digital assistance, the virtual FAs or the full service FAs to an individual at the corporate client? I’m just trying to understand how proactive you are with those introductions and what’s the timing for those?
A – Jed Finn
Yes. Well, it’s a complicated question because, obviously, every client is different and where they are in their advice journey is different. And so in order to make sure we best make that pairing, we’re capturing a lot of data. We’re taking a lot of feedback. We’re looking at how clients interact with the platform.
We’re tracking how often they call in. We’re tracking what they call about. And we’re trying to infer from that set of interactions what they’re trying to accomplish in their life. But we get a bunch of clues along the way.
And rather trying to trying to describe kind of each of the different journeys and how that works, what I would do — and this is admittedly a cop out, but what I would do is suggest that everybody go to the expo that’s downstairs right on the back of the lobby, and you can see how we make those decisions in real time because it will help bring it to life and see what we’re trying to deliver to help those clients achieve their goals.
Q – Unidentified Analyst
And the expo is open through Wednesday?
A – Jed Finn
I would imagine.
Q – Unidentified Analyst
Very good. All right. Jed, thanks very much for joining us this morning.
End of Q&A
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