Morgan Stanley made big news this week when it announced a $13 billion stock purchase of online broker E-Trade.
The deal raised some questions given Morgan Stanley’s position as a top investment bank and financial service provider for the ultra-wealthy. So what does one of Wall Street’s biggest firms want with a downmarket online brokerage firm?
For one, investment banking has become less important for Morgan Stanley’s bottom line since the financial crisis as wealth management has become a larger part of the pie. In 2019, wealth and investment management made up 51% of the firm’s pretax profit compared with 26% in 2010. Morningstar director of equity research, Michael Wong, says the deal furthers Morgan Stanley’s strategy of the last decade, “increasing its proportion of steady and capital light earnings business.”
After the E-Trade deal, Morgan expects that figure to rise to 57%. With E-Trade, Morgan Stanley will aim to do more cross-selling, work with next-generation clients, benefit from additional bank deposits that can be used for lending and target workplace planning accounts.
In an internal memo from wealth management head Andy Saperstein to staff (and obtained by Forbes), the acquisition will allow the firm to offer services to “all client segments, across all advice and service preferences, at scale.” The firm will “meet client needs wherever they are in their wealth journey and then evolve alongside them as their needs change…Our strategy is predicated on the fact that investors will always look to a highly-trained, trusted advisor for advice as their financial life becomes more complicated and their needs become more sophisticated,” according to the memo.
Saperstein went on to say that E-Trade will offer “access to a large pool of investors, many of whom are likely to need more comprehensive advice in the near future; others will transition over time.” E-Trade brings with it roughly 5.2 million clients with $360 billion in assets. And Morgan Stanley is betting that some of them have more complex needs that are not being met through the current platform on E-Trade.