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 The bank has offered checking accounts and credit cards for years,
but it is launching more consumer banking products and giving
brokers bonuses if clients use them.
The goal is to win more of the assets that customers keep at rivals
such as JPMorgan Chase & Co or Bank of America Corp. Right now, just
1 percent of Morgan Stanley's more than 3.5 million wealth
management clients actively use its retail banking products.
"You shouldn't have to deal with two or three financial
institutions," said Eric Heaton, president of Morgan Stanley U.S
Banks, in an interview with Reuters. "Just deal with us."
Morgan Stanley has no plans to build retail bank branches, and will
instead rely on its 16,000 brokers to sell the new products.
The effort may leave it looking a little more like a conventional
bank, a move that regulators have been encouraging since the crisis.
Its chief rival, Goldman Sachs Group Inc <GS.N>, took a similar step
in August, when it agreed to buy General Electric <GE.N> Capital
Bank's online deposit business.
The move is also likely to boost the bottom line - clients who
actively use Morgan Stanley's banking products hold on average 7
percent more assets at the firm than those who don't. The annual
fees that customers pay are often based on a percentage of the
client's assets at the firm. That fee income tends to be relatively
stable over time compared with many investment banking businesses.
The importance of stable results was driven home for the bank's
investors last month when it released third quarter earnings that
showed revenue in its bond trading business plunging 42 percent,
excluding an accounting adjustment that investors often ignore,
while revenue in its wealth unit, which includes brokerage fees,
interest income, and other items, fell just 3.5 percent.
Morgan Stanley's fee income and commissions have been falling since
the beginning of 2014, which the bank has made up for by generating
more revenue from areas including lending.
After multi-billion dollar trading losses brought Morgan Stanley
uncomfortably close to failure during the financial crisis, the bank
agreed to buy Citigroup's Smith Barney business in pieces starting
in 2009, turning its retail brokerage business from being an
afterthought into the source of about half the bank's revenue.
Goldman, by contrast, remains much more heavily reliant on bond
trading, stock underwriting, and other traditional investment
banking businesses to drive its bottom line. Investors seem to be
siding with Goldman Sachs now - its shares trade at about 1.15 times
their book value, an accounting measure of their net value, while
Morgan Stanley's trade at about their book value.
LOFTY GOAL
In addition to fee income, banking products offer more deposit
funding for Morgan Stanley, which regulators view positively. During
a financial crisis depositors are less likely than corporate bond
investors and other lenders to flee when trouble is brewing in
markets or at a bank. When rates rise, deposit funding is often
cheaper than other forms of borrowing.
Morgan Stanley now has around $139 billion of deposits in its bank
unit and is aiming to get up to $200 billion in the next several
years. To help its effort, it has assembled a team of card and
payment executives, many of who led similar businesses at Merrill
Lynch.
Tom Duffy, who heads banking services within wealth management, says
his product development team has more than doubled to around 34
since he joined the bank in 2011.Morgan Stanley's overall deposits,
at around $147 billion, fund a much smaller portion of its balance
sheet than most other banks - its deposits equal about 18 percent of
assets, compared with more than 50 percent for both JPMorgan Chase
and Bank of America. Winning more client assets may not be easy,
analysts noted.
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"It's a lofty goal to be the primary bank for every one of their
wealth management clients," said Glenn Schorr, an analyst with
Evercore ISI. But even if the bank wins just a sliver of business
from customers, Morgan Stanley will be better off, he said.
Some financial advisers also question whether they will be able to
push their clients, who may prefer to conduct their everyday banking
at a traditional bank branch, into changing their daily behavior.
"Five or six years ago, the whole banking effort at Morgan Stanley
was very embryonic - we were playing catch up in the space," said
Greg Fleming, Morgan Stanley's president of wealth management.
"We've been gearing up for this over the last few years and building
out our technology, which is why this is more of a 2016 initiative."
The technology Fleming referred to includes on-line banking and
mobile banking software.
Boosting retail banking products will help to expand wealth
management's profit margins. Last quarter, the pre-tax margin in the
wealth business rose to 23 percent, at the lower end of the bank's
long-term goals, and in line with Bank of America's wealth unit over
the same period.
In addition to adding executives to Duffy's product development
team, Morgan Stanley hired eight cash management specialists and
sent them to 60 wealth management offices around the country earlier
this year to train financial advisors and their support staff about
the firm's different cash management products.
It has also built up customer service teams of more than 50
representatives in Salt Lake City and Columbus, Ohio, and who answer
clients' questions about everyday banking.
This isn't the first time Morgan Stanley has dealt with retail
products. In the late 1990s, it merged with Dean Witter, Discover &
Company, giving it a retail brokerage and a credit card business.
The bank spun off Discover in 2007.
But Morgan Stanley never had a complete retail bank, which hurt it
between 2009 and 2013, when it bought the Smith Barney retail
brokerage unit from Citigroup. It lost some top advisers during that
period because it could not offer as many banking products as
Citigroup.
It began ramping up its lending business, and views its latest push
into retail banking products as the next step in its bringing its
business more in line with Bank of America's Merrill Lynch, for
example.
It still has ground to gain. Interest income at Morgan Stanley's
wealth management unit in the third quarter was $777 million,
compared with $1.38 billion at Bank of America's global wealth and
investment management unit, which includes Merrill Lynch wealth
management, U.S. Trust and related businesses.
(Reporting by Olivia Oran in New York; editing by Dan Wilchins and
John Pickering)
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