Amid lawsuits and regulatory scrutiny over the low returns firms sometimes offer on uninvested cash, Morgan Stanley became the latest Wall Street giant to announce changes to its "cash sweeps" policies.
Speaking on an earnings call Tuesday, Morgan Stanley Chief Financial Officer Sharon Yeshaya said the firm plans to modify its sweep rates for advisor-managed accounts in the third quarter "against the backdrop of changing competitive dynamics." Asked later by Wolfe Research analyst Steven Chubak if the planned changes were in any way prompted by industry regulators, Yeshaya declined to elaborate.
"I'm sorry, Steve," Yeshaya said. "We don't comment, as you know, on regulatory matters."
Morgan Stanley's decision to modify its sweeps policies comes after
Separately on Tuesday, Bank of America announced that it's making pricing changes on certain deposits held in its Merrill wealth management arm. A Bank of America spokesperson did not immediately respond to a request for elaboration.
Sweeping allegations
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The practice has been garnering increasing attention lately from both regulators and lawyers. Much of the scrutiny centers on the question of whether advisors with a fiduciary duty to serve their clients' best interests shouldn't be placing their uninvested cash in better-paying alternatives. Critics of the policies often note that both money markets and high-yield savings accounts offer returns of around 5%.
Morgan Stanley is the subject of two separate lawsuits questioning its cash-sweeps policies.
On Tuesday's earnings call, Yeshaya returned to the idea that the firm's sweep modifications were coming in response to "competitive dynamics." She said the changes will most likely cost the firm some net interest income in its third quarter. Those losses, she said, will be offset partly by gains in its investment portfolio.
She said the sweeps changes will only affect uninvested cash held in the firm's advisor-led channel. The bulk of clients' free money is instead in transactional accounts, she said.
"And in those transactional accounts, we have a wide range of choices in products for our clients," Yeshaya said. "And so therefore, they have a lot of options as you think about their transactional accounts and brokerage."
A spokesperson for the firm declined to elaborate on her comments.
Wealth management results
Morgan Stanley meanwhile reported that its intake of net new assets fell more than 60% in a quarter that nonetheless saw the Wall Street giant trudging toward its goal of having $10 trillion under management.
According to its earnings release, Morgan Stanley brought in $36.4 billion in net new assets in the three months leading up to June 30. That was down 62% from the previous quarter and 59% from the second quarter of 2023.
Speaking with analysts Tuesday,
"Year-to-date, annualized growth in net new assets in wealth management is over 5%, with another strong quarter of over $25 billion in fee-based flows," he said. "Strong fee-based flows support daily revenue, which on average has been $100 million each day this year and show the stability and continued growth of the wealth franchise."
The inflows helped push Morgan Stanley's client assets in its Wealth and Investment Management division to $7.2 trillion. That was up from
The firm also reported progress on its goal of bringing its pretax margin for its wealth management unit up to 30%. That number, the proportion of revenue the division keeps after subtracting all expenses save taxes, rose by 1 percentage point to 27% in the second quarter.
That helped drive the unit's net income up by 7% year over year to $1.4 billion on nearly $6.8 billion in net revenue. For all of its business units, Morgan Stanley reported $3.08 billion in net income on $15 billion in revenue.
Client assets
The firm's $7.2 trillion in assets was made up of $1.5 trillion in its investment management unit and nearly $5.7 trillion in wealth management. Of the wealth assets, just over $4.4 trillion was being managed by advisors, $1.25 trillion was held in self-directed E-Trade accounts and $452 billion was in the
Of the assets managed by advisors, $2.2 trillion, or 49% of the total, was in accounts generating fees. That number was up 18% year over year.
The firm also reported having 6.6 million participants in stock plans offered through its Morgan Stanley at Work workplace channel. That figure was up 2% year over year.
Wealth profit and revenue
Of the wealth unit's $6.8 billion in net revenue, nearly $4 billion came from managing clients' assets. That figure was up 16% year over year.
Yeshaya said in an earnings call that the firm's asset management fees, "the core of our wealth management strategy," climbed to a record high in the quarter.
"Our wealth management strategy is predicated on gathering assets, meeting our clients' lending needs and offering advice," Yeshaya said.
That was offset, though, by a 17% drop to $1.8 billion in net interest income, or NII. Glenn Schorr, an analyst at Evercore ISI, noted the NII figure was also down by 3% from the previous quarter.
"Seasonally softer net new asset growth and 3% quarter-over-quarter lower NII in wealth were the only real issues we saw," Schorr wrote in a note reported on by Bloomberg. "Our gut is tax season is mostly to blame and the rest of results were pretty darn good amidst this improving capital markets backdrop."
Expenses
Morgan Stanley reported $4.95 billion in noninterest expenses from its wealth management unit, a figure up 2% year over year. Of that, $3.6 billion went to compensation and benefits, a number up 3% year over year.
Morgan Stanley no longer reports how many advisors it has on staff. Its expenses related to compensation and benefits came to 53% of its net revenues for the quarter.
Remark
Yeshaya said she and other executives believe the flow of net new assets was down primarily because clients were setting aside money in the second quarter to pay taxes.
"Net flows will be lumpy in any given period of time and impacted by both the macroeconomic environment and business-specific factors," she said. "We believe both tax-related outflows and increased spending, particularly among high net worth clients, impacted flows this quarter. Still, our first half (net new asset) growth remains solid."
