How Morgan Stanley (MS) Makes Its Money

Morgan Stanley shares a name, or part of a name, with JPMorgan Chase & Co. (JPM) and it is not a coincidence. The “Morgan” in Morgan Stanley is J.P. Morgan’s grandson. The company was founded by Henry S. Morgan, Harold Stanley, and others in 1935. Morgan Stanley was created as an investment bank, but it is also considerably more. Morgan Stanley’s commercial banking operation, for example, competes against Wells Fargo & Co. (WFC), US Bancorp (USB), and similar retail outlets.

For the fiscal year 2021, the company reported its second consecutive record earnings of $59.8 billion, compared with $48.8 billion the prior year. This is an increase of 23% year over year.

On Oct. 14, 2022, the company reported net revenues of $13.0 billion for the third quarter of the year, compared with $14.8 billion a year before.

Institutional Securities

Morgan Stanley’s three major business units are Institutional Securities, Wealth Management, and Investment Management. Institutional Securities is Morgan Stanley’s biggest moneymaker, with net revenues of $29.8 billion in the 2021 fiscal year.

Institutional Securities’ clients are comprised of corporations, governments, financial institutions, and high- to ultra-high-net-worth clients. This business segment offers services such as investment banking, sales and trading, and other products like corporate lending activities.

In its fiscal 2021 year, wealth management revenues were up 26.7% and investment banking revenues were up 68%, compared to the year before.

Morgan Stanley’s investment banking arm makes money by charging fees on advisory services such as restructurings and mergers and acquisitions.

Globally, Morgan Stanley is consistently highly ranked in mergers and acquisitions and initial public offerings (IPOs). Some of the underwriting includes securities offerings and the syndication of loans. In terms of sales and trading, Morgan Stanley earns a profit by acting as a market maker for customers’ purchases and sales of financial instruments.

The Rich Get Richer

Morgan Stanley’s Wealth Management operations–which provides a range of financial services and solutions to individual investors and small to medium-sized businesses/institutions–require the services of over 16,000 professionals doing business around the world. Morgan Stanley advises about 3.5 million people and holds more than $3.9 trillion in advisor-led client assets.

Morgan Stanley offers products and services in brokerage and investment advisory, retirement plans, and financial and wealth planning services, among other things. Wealth Management’s net revenues in 2021 were up from 2020 as a result of growth in asset management revenues and net interest income.

Market appreciation and net positive flows have increased asset management revenues, but some of these revenues have been offset by decreases in average fee rates. For example, Morgan Stanley earns money off of fee-based clients by charging a contractual percentage of their assets related to accounts that are generally not driven by asset class.

All in all, Wealth Management took in net revenues of $24.2 billion with a pre-tax margin of 26% in 2021.

Enriching the Middle Class

Investment Management, Morgan Stanley’s smallest department, does most of its work with institutional investors. This includes endowments, government entities, sovereign wealth funds, and insurance companies. 

In 2021, the Investment Management division’s net revenues were $6.2 billion. representing a 66% increase over 2020. The higher revenues were driven, in large measure, to record assets under management of $1.6 trillion.”

Net revenues in the Investment Management group come from two places– Investments and Asset Management–both of which rose in 2021. Morgan Stanley makes money from Investments through certain closed-end funds that are typically held for long-term appreciation and subject to sales restrictions.

On the other hand, Asset Management earns their keep through various contractual agreements. One example of this would be receiving performance-based fees based upon a percentage of the appreciation earned by investments made by the money manager. 

The Bottom Line

The economy offers few certainties, but here is a couple of them: Companies, both upstart and established, will continue to get their hands on money. Investment firms, at least in the foreseeable future, are going to be a lot more adept at raising funds than even the best crowdfunding sites. With that in mind, it is a conservative bet that Morgan Stanley will continue to make billions of dollars.