Morgan Stanley, owner of the world’s largest brokerage, hired 100 bankers to offer more products such as jumbo mortgages and structured loans to Morgan Stanley Smith Barney clients and may quintuple their numbers by the end of 2011, a person with knowledge of the strategy said.
The firm is building a private bank to squeeze more revenue from clients and encourage them to hold deposits at the company. Morgan Stanley’s wealth management group had $191 million of interest income in the first quarter, a fraction of the $1.1 billion at Bank of America Corp.’s Merrill Lynch unit. Private bankers offer loans, savings products and sometimes investment advice to a bank’s wealthiest clients.
“There is always this hidden opportunity of cross-sell,” said Steve Stelmach, an analyst at FBR Capital Markets in Arlington, Virginia. “Merrill Lynch has been successful in offering mortgage products to their retail customers, so the precedent is there.”
Morgan Stanley joins Citigroup Inc. and JPMorgan Chase & Co. in trying to do more business with wealthy customers as the weak economy and new regulations make it harder to earn money from loans and investment banking. Bankers have pushed cross-selling for decades, often with little to show for it, to expand their business without having to sign up new customers.
Fed Approves Application
“Every major financial firm has decided they are going to grab a piece of wealth management, whether it’s private banking or advisory,” said Jeanne Branthover, head of the financial-services practice at Boyden Global Executive Search in New York. “The combination of financial advisers working with the private bankers is becoming more common. Ten years ago, they were totally separate.”
Private bankers are usually paid a salary and a bonus, while financial advisers’ compensation is based on commissions, Branthover said.
The Federal Reserve Bank of New York today approved Morgan Stanley’s application to create Morgan Stanley Private Bank N.A. It’s headed by Cece Stewart, 52, whom Morgan Stanley hired in 2008 from Wachovia Corp., where she had risen to executive vice president from branch manager over three decades. The firm started hiring the private bankers last year.
Boosting Loan Balances
The private bank plans to as much as triple its loan balances to between $50 billion and $60 billion by the end of 2014, said the person, who declined to be named because the plans haven’t been made public. The bank now has about $19 billion in loans largely from its previous lending efforts, which mostly focused on agency mortgages, the person said.
The private bank will also offer deposit products to clients who hold more than $1.6 trillion of assets in the brokerage. Morgan Stanley considered buying a banking franchise before deciding to build its own private bank in the first half of 2009, the person said. That was the same year that Morgan Stanley formed its brokerage, which has more than 18,000 advisers, when it bought a controlling stake in the joint venture with Citigroup. Merrill Lynch, by comparison, has about 15,000 financial advisers.
JPMorgan, the second-largest U.S. bank by assets, said today it named Barry Sommers to lead an effort to boost the share of assets it holds for its wealthiest client to more than the current 5 percent. Sommers was named CEO of Retail Affluent and Investment Services, giving him responsibility for the bank’s 2,700 financial advisers.
The initiative could increase pretax profits by $500 million to $1 billion annually, Charlie Scharf, JPMorgan’s head of retail financial services, said in a statement.
Citigroup has hired about 15 private bankers since March and will add another 115 over the next several years, spokesman Mark Costiglio said in an interview last month.
Bank of America is trying to persuade its 12 million customers to move funds from rival brokers to Merrill Lynch and wants Merrill Lynch clients to transfer some of the $500 billion they have at other banks, according to a May 10 presentation. Wells Fargo is focused on 3 million customers who keep more than $250,000 for investments at other companies, according to Senior Executive Vice President David Carroll.
It’s often difficult to gauge how successful efforts to sell clients new products are because banks rarely provide data on their cross-selling efforts, said Stelmach, the FBR analyst.
Morgan Stanley is now offering jumbo mortgages, home-equity lines and securities lending, said Armando Cabo, a private banker who joined from JPMorgan this year. The bank plans to offer some commercial loans to clients later this year, Cabo said. It’s offering mortgages of up to $5 million and home-equity lines up to $2.5 million, spokesman Jim Wiggins said.
The private bankers will work with financial advisers to arrange lending options for clients, with the advisers remaining the primary contact. Cabo said he’s working with about 80 to 90 advisers.
The firm has been offering “aggressive” interest rates to win clients, said Shawn Rubin, a Morgan Stanley Smith Barney financial adviser in New York. Lending and managing clients’ liabilities will probably be the highest-growth revenue source of his business this year, Rubin said.
“The markets have been very challenging for a while, and clients are sort of used to the markets not doing a whole lot for their net worth,” Rubin said. “So they are really focused on the other avenues of wealth management, whether that’s risk management or liability management.”
Record low home-loan rates may prompt some clients who had loans with other banks, including Citigroup’s private bank, to refinance, providing a chance for Morgan Stanley to gain market share, Rubin said. Rates for 30-year fixed loans declined to 4.69 percent in the week ended June 24, mortgage-finance company Freddie Mac said last week. That’s below the previous record of 4.71 percent, set in the week ended Dec. 3.
Jumbo mortgages are larger than the ones that government-supported Fannie Mae and Freddie Mac can finance, now from $417,000 to $729,750 in high-cost areas. About 10.3 percent of U.S. prime jumbo mortgages which backed securities were at least 60 days late in May, according to Fitch Ratings. That’s up from 10.2 percent in April, marking the 36th straight increase for “serious delinquencies.”
Morgan Stanley’s wealth-management unit had revenue of $3.11 billion in the first quarter, down from $3.14 billion in the fourth. Chief Executive Officer James Gorman, who led the unit before succeeding John Mack in January, said in a letter to shareholders this year that the joint venture will play “an increasingly important role in our growth and profitability.”
The effort is likely to lower the wealth-management unit’s compensation ratio over time, according to two people briefed on the matter. The division’s ratio of compensation costs to revenue was 64 percent in the first quarter, compared with 41 percent in the institutional securities business, which includes the trading and investment banking units.
“We’re making huge investments on the lending front, because Morgan Stanley did not do things like non-conforming mortgages and structured or tailored loans, and we had that through Citi’s private bank,” Charles Johnston, president of Morgan Stanley Smith Barney, said in an interview in April. “There’s a huge opportunity there, and we’ve got that now, we’ve built that.”