The Wealth management industry is poised to benefit from operating leverage and cyclical exposure, leading to the industry’s recovery.
Brad Hintz and team at Bernstein Research point out that with improving revenues since the trough in 2010, the wealth management industry’s profits would improve.
Wealth management industry: Improved profitability
According to the Bernstein report, the wirehouses such as Morgan Stanley (NYSE:MS), Merrill Lynch, Wells Fargo & Co (NYSE:WFC) and UBS AG (NYSE:UBS) and regional brokers witnessed expanding pre-tax margins over the past three years. The rationalization of FA headcount and segmenting markets to target the most profitable client relationships have allowed reduction in compensation ratios and controlling of expenses. These have in turn driven up the profitability of wealth management firms.
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Brad Hintz and team at Bernstein Research points out that since the 2008 crisis, revenue has been growing across the industry both at the firm level and on a per broker basis. This can be evidenced from the following graph:
Bernstein anticipates that with further re-engagement of retail investors with the market, revenues will continue to grow.
Improved client assets
The analysts observed that Wall Street’s wealth management revenues are closely correlated with U.S. employment. With an improved employment picture, retail investors tend to become more risk tolerant and re-embrace the equity markets.
According to the Bernstein report, in recent years client assets have grown for the wealth management industry, both at the firm level and on a per broker basis. The analysts point out that historically greater client assets per financial advisor are statistically associated with improved pre-tax margin.
The following graph highlights the growth in client assets both at the firm level and on a per broker basis:
The analysts note the cyclical retail situation appears to be improving, five years after the crisis. Retail brokerage revenue has historically been linked closely with US non-farm payroll. Based on recent forecasts for U.S. unemployment, the analysts believe a full wealth management industry rebound can be expected in 2014 and 2015.
Morgan Stanley receives Outperform rating
According to the Bernstein analysts, the wirehouses form an oligopoly of retail financial channel distributors. These firms dominate the segment of the wealth management market servicing $1 to $3 million retail accounts in the U.S. However, among these firms, Bernstein notes Morgan Stanley (NYSE:MS) and Merrill Lynch have the largest pool of client assets and the most productive sales forces.
The analysts point out that Morgan Stanley (NYSE:MS)’s wealth management business has been a focus and produced stable revenue in recent years. Morgan Stanley’s fee-based assets too have been steadily increasing as a share of client assets, as evidenced in the following graph:
With its massive operating leverage and interest sensitivity, Bernstein rates Morgan Stanley (NYSE:MS) as Outperform.