Amid probes, Morgan Stanley vows not to change its wealth strategy

Jeenah Moon/Bloomberg

Morgan Stanley isn't changing the way it runs its wealth management business, even as various federal agencies probe the unit for potential money laundering issues, top executives said Tuesday.

Five days after the Wall Street Journal reported on the existence of multiple investigations into how the investment bank vets prospective clients and the source of their wealth, CEO Ted Pick minimized the situation, saying that the firm has "been spending time, effort and money" on the issues for many years.

"This is not a new matter," Pick told analysts during the company's first-quarter earnings call. "We've been focused on our client onboarding and monitoring processes for a good while."

He pointed to record revenue in wealth management — where net revenue totaled $6.9 billion for the quarter — as well as strong margins and a boost in net new assets, and said the costs associated with improving processes are mostly baked into the firm's forecasted expenses.

In response to an analyst's question about whether the investigations would alter the business strategy around wealth management, Chief Financial Officer Sharon Yeshaya said they wouldn't.

"This is a phenomenal business … and we're in a great position," she said. "There are no changes in our ability to do business, and we're extremely confident in our ability to grow and to deepen the relationship with the breadth of firm offerings that we have to serve our clients."

Wealth management has been critical to Morgan Stanley's business model since the 2008 financial crisis. Last year, the unit reported net revenues of $26.3 billion, nearly half of the firm's total net revenues of $54.1 billion.

Acquisitions have helped grow the division. In 2020, Morgan Stanley bought the discount brokerage E-Trade Financial. Years prior, it acquired the retail brokerage Smith Barney from Citigroup.

Government agencies that are looking into the business include the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Treasury Department's Financial Crimes Enforcement Network and Treasury's Office of Foreign Assets Control, according to the Wall Street Journal.

The Federal Reserve is running a similar probe, the Wall Street Journal reported in November.

One part of the investigations appears to involve international clients, the Journal has reported. 

When pressed Tuesday by Glenn Schorr, an analyst at Evercore ISI, to provide details about how much Morgan Stanley's wealth management business relies on international clients, Yeshaya said they account for only a "small" portion of the business.

The first quarter of 2024 was the first with Pick in the CEO seat. The longtime Morgan Stanley executive took over on Jan. 1 from James Gorman, who is now executive chair.

In January, Pick laid out his vision of Morgan Stanley as an "integrated" firm. He told analysts at the time that one of his key objectives is to grow client assets to $10 trillion and "just keep on going." In the first quarter, client assets were $7 trillion, up from $6.6 trillion in the prior quarter.

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Morgan Stanley reported quarterly net income of $3.4 billion, up 14% year-over-year, on firmwide revenues of $15.1 billion.

Earnings per share totaled $2.02, up from $1.70 for the same quarter last year and beating the average estimate of $1.67 per share from analysts surveyed by FactSet Research Systems.

The firm reported a return on tangible common equity of 19.7%, up from 16.9% in the prior-year quarter. It repurchased $1 billion of stock during the quarter, a bit lower than some analysts predicted.

Other positive aspects of Morgan Stanley's quarter included lower non-compensation expenses and a credit provision release of $6 million, versus a build of $234 million in the year-ago period. 

Less stellar parts of the earnings report included a decline in merger-and-acquisition activity and net interest income in the wealth business that was flat sequentially.

Still, "the quarter in aggregate underscores the same growth and profitability story that got people excited," Schorr wrote in a research note.