Bloomberg News

Morgan Stanley’s Fleming Sees at Least Mid-Teens Margin in 2013

October 25, 2011

Oct. 25 (Bloomberg) -- Morgan Stanley Smith Barney, the world’s largest brokerage, will operate with a “mid-teens” pretax margin by the first half of 2013 “irrespective of the market,” according to Greg Fleming, president of the business.

The brokerage can reach the 20 percent pretax profit-margin target that Morgan Stanley Chief Executive Officer James Gorman has set for the unit, Fleming, 48, said today in an interview on Bloomberg Television with Erik Schatzker. The division had a 10 percent margin in the first nine months of this year.

“Eventually we’ll have a higher S&P and higher interest rates, and that will be the final piece to put us at and over 20 percent,” Fleming said.

Investors are looking for an increase in profitability at the brokerage joint venture, which Morgan Stanley bought a controlling interest in two years ago. It has the option to buy the business outright from Citigroup Inc. over the next three years. The division, which Fleming took over in January, had 17,291 advisers and $1.56 trillion in client assets as of Sept. 30.

“In a Basel 3 world, with the capital standards changing on some of the trading businesses, these activities are even more valuable,” Fleming said. “We don’t think the market today appreciates the business mix that we have and the earnings power that it will generate going forward, but we’re willing to be patient and continue to stay at it and continue to drive higher margins and better results, and ultimately the market will reward that.”

Fee-Based Accounts

Morgan Stanley Smith Barney will increase revenue in part by raising the amount of assets in its fee-based advisory consulting accounts, Fleming said. The firm’s goal is to more than double those assets to $1 trillion during the next five years, from $465 billion as of Sept. 30.

Fleming said there are three “revenue drivers” and two “expense levers” the brokerage can use to improve profitability regardless of the market environment. Revenue from deposits, lending and transaction and advisory services, along with decreasing integration expenses and cost synergies, will drive the margin improvement, according to a presentation by Gorman in February.

A 100-point change in the Standard & Poor’s 500 Index and a 50 basis-point change in the Fed Funds rate each would have about a 1 percentage point effect on the brokerage’s pretax profit margin, Gorman said in February.

--Editors: Steve Dickson, William Ahearn

To contact the reporters on this story: Michael J. Moore in New York at mmoore55@bloomberg.net; Erik Schatzker in New York at eschatzker@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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