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- Morgan Stanley said on Thursday it planned to buy E-Trade in a deal set to close in the fourth quarter.
- Morgan Stanley is making a big play for smaller, Main Street customers it’s long tried to reach, through E-Trade’s self-directed brokerage platform and stock-plan administration business.
- The bank is also making its first foray into the registered investment adviser (RIA) business, a fast-growing corner of the wealth management industry that Goldman Sachs pushed into last year with United Capital.
- Business Insider spoke with analysts and sources familiar with the deal about why Morgan Stanley was interested in E-Trade for $13 billion, or roughly $4 billion more than E-Trade’s market cap on Wednesday.
- If the E-Trade buy goes through, wealth and investment management will contribute some 57% of the Morgan Stanley’s pre-tax profits, excluding possible cost-savings as a result of the deal. That means the Wall Street firm has seen a massive reshaping in its businesses over the past decade.
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Morgan Stanley, the white-shoe New York investment bank best known for advising high-net-worth clients and bringing companies public in high-stakes deals, is making a landmark attempt to head down-market.
The largest takeover by a large US bank since the global financial crisis places a final point on years of investor speculation around when, not if, E-Trade would be acquired. That speculation has ratcheted up considerably since brokerage giants Charles Schwab and TD Ameritrade said last November that they would combine.
The need for sheer scale and appealing to customers as a one-stop shop for their financial needs has become critical for wealth management and brokerage firms in recent years as a new generation of customers have grown accustomed to commission-free or dirt-cheap prices for services, from stock-trades and investing to advice.
Sources familiar with the deal told Business Insider that Morgan Stanley is making a play for the smaller, Main Street customers it’s long attempted to reach through E-Trade‘s self-directed investing platform and stock-plan management business. Meanwhile E-Trade does not have financial advice services, a business in which Morgan Stanley, with some $2.7 trillion in client assets, is a giant.
With E-Trade, Morgan Stanley is also venturing into the registered investment adviser (RIA) space, a fast-growing corner of the wealth management industry that Goldman Sachs pushed into last year with its United Capital purchase.
“The firm has made movements down-stream; this is another step in that direction,” Jennifer Butler, director of asset management and brokerage research at the industry research firm Corporate Insight, told us. “This will solidify Morgan Stanley’s place in the workplace solutions and retail investing space.”
The all-stock deal, a premium of around $4 billion to E-Trade’s market cap on Wednesday, is expected to close in the fourth quarter and lead to some $400 million in cost-savings.
Morgan Stanley advised itself on the deal, according to a person familiar with the matter. JP Morgan Securities served as the lead financial adviser to E-Trade on the deal, another person familiar with the matter said, while Skadden, Arps, Slate, Meagher & Flom acted as outside legal counsel to E-Trade.
E-Trade’s stock-plan administration users may one day need Morgan Stanley’s financial adviser army
One of the reasons Morgan Stanley went in for E-Trade was to capture the customers — everyday employees at companies around the US — who use the brokerage’s stock-plan administration platform. For 2019, E-Trade reported $296 billion in total assets under its corporate services umbrella, bringing in a record $24 billion in assets last year.
“They’ve had a killer business for a long period of time,” Morgan Stanley chief executive James Gorman said of the stock-plan administration business on a call Thursday morning to discuss the deal with analysts.
The bank had already pushed further into that business with its $900 million Solium Capital purchase that closed last year and brought in some 1 million participants. That business was re-branded as Shareworks by Morgan Stanley. Prior to that purchase, the firm’s stock-plan administration business covered some 1.5 million employees across 330 corporate clients, including Microsoft and Ford Motor, the Wall Street Journal previously reported.
This opens up the business to more customers who may one day build up more wealth and need Morgan Stanley’s force of 15,468 financial advisers to manage their money as lucrative wealth management clients.
Together, the firms estimate they will now have 4.6 million stock plan participants and oversee some $3.1 trillion in client assets overall. And if the deal closes, Morgan Stanley’s combined wealth and investment management business will become even more meaningful to the overall firm than it has in recent years.
E-Trade’s self-directed investment platform is also another channel that could ultimately refer clients to wealth managers. It had nearly 5.2 million retail customer accounts in January, according to the latest figures. Total retail and adviser services assets totaled $387 million.
They’ve had a killer business for a long period of time
Once the E-Trade buy goes through, wealth and investment management will contribute some 57% of the Morgan Stanley’s pre-tax profits, excluding possible cost-savings as a result of the deal.
That marks a massive reshaping of the Wall Street bank. In 2010, the divisions together contributed just 26% to the bottom line, Morgan Stanley said in a statement about the E-Trade deal.
Morgan Stanley is not the only firm increasingly relying on its wealth management arm to drive growth as other volatile areas, like trading, have come under pressure across Wall Street. Big names like Goldman Sachs, Credit Suisse, and UBS have done the same, and Business Insider reported last month that Silicon Valley Bank, which has for decades been a lender for technology executives and founders, is looking to build out its private banking and wealth advisory units.
Gorman also tried to emphasize that the deal would not disrupt financial advisers’ work. A person familiar with the matter told us the deal was not so much about cost-savings as it was about making a strategic move in the market.
“I don’t think financial advisers will view this as a situation where they’re competing with an internal channel,” Michael Foy, senior director of the wealth management practice at J.D. Power, told Business Insider.
A risk to existing clients, though, could be in what’s drawn them to E-Trade in the first place, Foy said. It was long seen as a cheap, independent stock-trading option that struck gold in day-trading customers during the dot-com boom.
That sheen could possibly wear off when the two brands merge, Foy said. A recent J.D. Power survey of customers’ brand perceptions placed Morgan Stanley at one extreme, embodying the meaning of “full-service” wealth management, while E-Trade was at the opposite end.
Morgan Stanley’s foray into the fast-growing RIA world, but not a ‘primary motivator’
Another piece of E-Trade’s business is its RIA custody business, a fast-growing industry outside of the traditional wirehouses of UBS, Wells Fargo, Merrill Lynch, and Morgan Stanley.
“It’s an obvious push into the RIA space,” Will Trout, global head of the wealth management research practice at Celent, a division at consultant Oliver Wyman, said in an interview.
However, E-Trade’s RIA segment, overseeing some $20 billion in assets, is tiny by industry standards. And it “wasn’t the primary motivator of the transaction,” Gorman said on the call earlier with analysts.
E-Trade, which recently moved its headquarters from New York City to New Jersey in an effort to cut costs, two years ago closed on a deal to buy independent adviser custodian Trust Company of America (TCA) for $275 million. E-Trade has around 410 in-house financial consultants of its own.
“They’ve been presenting themselves as the good guy, RIA-friendly alternative to what appears to many RIAs as a Schwab-TDA beast,” Trout said, adding that the whole deal appears to be a play for the mass-affluent market so many wealth management players are after.
The Credit Suisse analyst Craig Siegenthaler, for his part, said he was curious about whether Morgan Stanley will “keep an independent RIA platform under its roof which may not mix well with its own employee channel.” He added that having the two businesses side-by-side, referring to the new RIA channel and its own force of thousands of advisers, may “add a layer of complexity.”
Another dimension to the competition mounting around firms in the brokerage business, which includes Connecticut-based Interactive Brokers, is the expansion of so-called “breakaway” advisers and adviser teams exiting big wealth managers like Wells Fargo and forming their own independent firms.
Since firms like Fidelity, Schwab, and E-Trade all have business lines catering to that growing segment, they’re competing for independent advisers in what’s become a crowded space.
Total assets under management associated with advisers’ exits from wirehouses reached a record $190 billion last year, according to Echelon Partners, an investment bank focused on the wealth management industry.
“RIAs are expected to continue to expand their footprint, taking assets from broker dealers and large wirehouses,” the firm said in a recent report.
Throughout the course of deal talks, the takeover was referred to as Project Eagle, the Wall Street Journal reported.
The outlet also reported that the deal talks began in late December, weeks after the Charles Schwab-TD Ameritrade deal was officially announced. Gorman, who was appointed chief executive in 2010, said on a call with analysts that he’d thought about executing the deal for the firm before.
The E-Trade plan is not the first time Morgan Stanley has attempted to step into the business of managing money for regular customers. In 1997, the firm said it would buy Dean Witter, a retail stock brokerage then aimed at smaller customers.
“Morgan Stanley saw Dean Witter as the perfect pipeline from Wall Street to Main Street,” the New York Times said in a February 1997 article detailing the deal. “With thousands of salespeople in many cities and towns, Dean Witter was just the ticket.”
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