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Industry Spotlight > Wirehouse Firms

What's Crushing Wealth Management Results at the Wirehouses?

By Ryan W. Neal

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What You Need to Know

  • In Q3, wealth units at Morgan Stanley, Bank of America and Wells Fargo all underperformed relative to 2022.
  • Executives blame high interest rates encouraging retail investors to keep more of their assets in cash and cash alternatives.
  • But they also see signs that things will turn around in 2024.

After years of strong growth, including through last year’s tumultuous market, wealth management divisions at some of the largest financial institutions have finally come up short of expectations. 

As firms reported earnings, results from the wealth businesses at Morgan Stanley, Bank of America and Wells Fargo all underperformed relative to 2022. Executives at the firms blame high interest rates encouraging retail investors to keep more of their assets in cash and higher-yielding cash alternatives. 

Morgan Stanley brought in $35.7 billion in net new assets during the third quarter of 2023, 45% less than it brought in during the year-ago period and 60% less than the previous quarter. Net revenue dipped 4% from the previous quarter and total assets under management fell 2%.

While revenue and client assets are up 5% and 16% year over year, respectively, it’s a far cry from October 2022, when Morgan Stanley CEO James Gorman celebrated the wealth management business continuing to perform well despite market indexes dropping more than 20%.

On this year’s call to discuss third-quarter earnings, Gorman noted that results are “obviously below recent quarters.” 

“As anticipated, the market environment in aggregate remained mixed continuing a pattern we’ve seen over the past several quarters,” Morgan Stanley’s CEO said. “The concerns around a tight employment market, high commodity prices, inflationary pressures that may impact Fed policy provide additional challenges later in the quarter.”

Rivals’ Reports

The story was similar at Bank of America, which reported earnings on Tuesday. The bank’s global wealth and investment management business, which includes Merrill Lynch Wealth Management, had net income of $1.0 billion in the third quarter, 13% less than same period in 2022. Revenue fell 2% from a year ago to $5.3 billion.

Meanwhile, Wells Fargo reported that third-quarter revenue from its wealth management business increased 1% from a year ago, while income fell 17%. Total assets fell 3% from the second quarter to $1.9 trillion but rose 11% from the previous year.

On the company’s earnings call, CEO Charlie Scharf noted that the Wells Fargo Advisors business has “treaded water for a long period of time,” while CFO Mike Santomassimo said outflows from the wealth business contributed to a decline of 5% in average deposits from a year ago. 

“While average deposits were down compared to both the second quarter and a year ago, the pace of the decline slowed in the third quarter,” Santomassimo said. 

The Main Problem

Executives across the three firms blame high interest rates set by the Federal Reserve, which is encouraging clients to keep more of their wealth in cash.

For example, 23% of retail client assets at Morgan Stanley are sitting in cash, compared with the historical average of 18%, said CFO Saron Yeshaya. This impacted net interest income, which declined 9% from the previous quarter and 3% YOY. 

NII was down 7% at Wells Fargo as clients reallocated toward cash and higher yielding alternatives. 

Bank of America also attributed decreased revenues from wealth management to lower NII, but said losses were offset by higher asset management fees due to higher market levels and client flows.

New advisors brought in $87 billion in total net flows, while the global wealth business added nearly 7,000 new client relationships, according to Bank of America CEO Brian Moynihan. 

“Basically, all the movement … has been made pretty much to the higher rate environment, i.e., buying Treasury securities directly,” Moynihan said. “If you look at our wealth management business, the amount of short-term cash-oriented type investments, money market funds, etc., Treasurys, etc., has gone from like $500 billion to $700 billion or $800 billion over the last several — last couple of years.”

Executives at the three banks stressed confidence in the health of their wealth businesses, pointing to strong organic growth and technology helping to drive greater efficiencies for financial advisors.

They are also bullish on 2024. For example, Morgan Stanley saw consistent monthly inflows into equity markets from cash accounts, indicating that retail clients want to reenter markets. 

As rates come down, people will be less sensitive about the yield they are generating on cash and start using more for liquidity to manage investments, Gorman said. 

“We are seeing increasing evidence of M&A and underwriting calendars that are building and while we expect momentum to continue this year, given the fourth quarter has some seasonal considerations, we expect most of the activity to materialize in 2024,” Gorman said.

Image: Adobe Stock

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