Morgan Stanley, Raymond James CEOs on the advantages of size

At a time when many advisors dream of breaking away to start their own practices, the top executives at Morgan Stanley and Raymond James have little doubt of the advantages of sticking with big players.

Speaking Tuesday at his firm’s annual U.S. financials, payments and commercial real estate conference in New York, Morgan Stanley CEO Ted Pick estimated that there are $60 trillion in client assets to be managed worldwide. Of that, Morgan Stanlety is already overseeing $6 trillion. And the firm’s clients are estimated to be holding away anywhere from another $8 trillion to $10 trillion at other institutions.

Morgan Stanley’s plans to attract more of those assets center in large part on services it offers through its workplace division, Morgan Staney at Work, which helps employers manage equity compensation plans and other employee benefits. Pick said $300 billion has come down the firm’s “funnel” to financial advisors from Morgan Stanley at Work in the past five years. The last quarter alone saw an inflow of $20 billion.

“We call that reinvestment, and when times are good, that reinvestment is running at 10% per annum,” Pick said. “So it’s not just the assets outside the funnel coming in. It’s the velocity of the assets inside the funnel working their way towards the financial advisor when it’s appropriate.”

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Pick said Morgan Stanley is encouraging clients to bring over more assets also by offering them more banking services and offering greater access to alternative investments like private equity and credit. He noted that as recently as 2018, Morgan Stanley had relationships with only 2.5 million client households. Now, he said, it’s 20 million.

“Two and a half to 20,” Pick said. “It’s a whole new ballgame in seven years.”

Pick said client assets are increasingly flowing into fee-generating accounts managed by financial advisors. Advisory fees are often prized in the industry for their ability to generate steady income in many different types of market conditions.

“Not all assets are meant to go there, but that is the golden chalice for the firm, for the client, for the ecosystem, we believe, for valuation on a long-term basis,” he said.

‘Quality over quantity,’ Raymond James CEO says about advisors

Speaking earlier in the day at the same conference, Raymond James CEO Paul Shoukry similarly touched on some of the advantages he sees to being at a large firm. He noted Raymond James’ plans to invest roughly $1 billion in technology.

“Most of that’s going in the wealth business,” Shoukry said. “If you’re a smaller wealth firm and you can’t keep up with those types of investments, to remain competitive, it’s going to really challenge your ability to remain independent.”

At the same time, Shoukry suggested there’s such a thing as being too big. Raymond James’ advisor headcount — although large — still lags behind those of some of its direct competitors.

When Raymond James last reported its total, in October, it stood at 8,787 — 3,826 direct employee advisors and 4,961 independent contractors. Its rival LPL Financial meanwhile is approaching 30,000, while Cetera Financial Group — another independent broker-dealer — has roughly 12,000.

Shoukry called out no firms by name. Raymond James, he said, has set a priority on having the best business rather than the biggest.

“Some of these other firms are servicing tens of thousands of advisors with a fraction of the average production — so it’s a very different model,” he said. “We focus on quality over quantity, in terms of the advisors that we have. Whereas so many other firms, particularly on the independent side of the business, are focused on quantity over quality.”

Raymond James is nonetheless extending its presence to more of the U.S. After long having its stronghold in the Southeast, the firm has been making a push into other parts of the country.

Raymond James has been making some inroads in those regions. In October, it announced it had picked up a team formerly managing $1.3 billion for Merrill in Fort Worth, Texas, and another formerly managing $1 billion for Merrill in Williamsville, New York. In April, it said it had recruited an advisory team in Scottsdale, Arizona, that had formerly managed $828 million for RBC. 

Shoukry said Tuesday that competition for advisors and market share remains intense in the West and Northeast. Meanwhile, Raymond James isn’t lacking for opportunities near its home base in St. Petersburg, Florida.

“We have a significant opportunity to grow in Florida,” he said. “I think of Sarasota, which is an hour away from our headquarters.”

Shoukry said Raymond James pulls as much as 80% of its newly recruited advisors from large firms like the four traditional wirehouses: Morgan Stanley, Merrill, UBS and Wells Fargo. Most who join cite the “culture” as the reason, he said.

When advisors leave, Shoukry added, it’s usually because they were offered a big recruitment deal by a rival firm. Some are going through a divorce or other big life changes and are eager to get upfront money in return for moving their practices.

“When we lose, it’s very rarely because they like the culture at the other firm, or they like the capabilities at the other firm better,” Shoukry said. “It’s almost always because the other firm was willing to write a bigger check. And I always say, in the absence of a value proposition, the biggest check is the only way those types of firms can compete.”

Shoukry said Raymond James is seeking to maintain its competitive advantages by making sure advisors have access to cutting-edge technology. Shoukry noted his firm’s heavy investments in artificial intelligence, including its recent appointment of a chief artificial intelligence officer. 

At the firm’s recent investor day, Raymond James executives estimated an AI-driven meeting-summary system saves advisors anywhere from two to six hours of work time per week. Shoukry said Tuesday that his firm is now devoting a fair amount of resources to making sure the data it feeds into its AI systems is “clean” — or able to be used easily for analysis or other purposes.

“We launched, for example, generative AI for internal search capabilities on our what we call RJ Net,” Shoukry said. “And … after we rolled it out, the issues that we had with the quality of the search responses was bad data that needed to be cleaned up in the underlying internal pages.” 

Tapping wealth management clients for greater growth

Both Shoukry and Pick called attention to how their firms are trying to appeal to more clients by offering a wide variety of banking services and access to alternative investments. Although Morgan Stanley is mostly known for its investment banking and wealth management lines of business, it also has a traditional bank that takes in deposits and hands out loans.

Pick conceded Tuesday that Morgan Stanley has been slow to raise deposits by taking steps like encouraging wealth management clients to open checking accounts. Some of Morgan Stanley’s industry rivals have seen a good deal of success in making sure their wealth investors also have banking relationships with their firms.

Merrill, for instance, boasted in its most recent earnings call that nearly two-thirds of its clients also work with its parent company, Bank of America. Morgan Stanley’s comparable percentage, Pick said Tuesday, is in the “mid-teens.”

“There’s stuff that we need to do,” he said. “We have been doing bespoke and tailored lending for high net worth individuals, folks inside of our corporate stock plans who should get preferred access.”

On the plus side, Pick said, Morgan Stanley remains the leading distributor of alternative investments to clients. He said that roughly 5% of the assets the firm manages are now in alts.

He said that number could easily be higher.

“Maybe it’s 10%, maybe it’s 15%, maybe it’s more,” he said. “But it’s somewhere in that range, for alt-weighting for ultra high net worth [clients],” Pick said. “That means that, today, we are structurally underweight in the system, $250 billion to $500 billion in alts.”