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Morningstar | Morgan Stanley’s Wealth Management Business Could Disappoint Its High Expectations

We remain cautious on Morgan Stanley continuing its strong performance of the previous several years, as we're likely near the peak of this capital market cycle. Forecasts for global economic growth have been moderating, and people are seeing indicators of a recession in the next year or two. Even the overlying sentiment of a recession being around the corner can depress the investment banking business lines that Morgan Stanley is in.Besides a recession and general turn in the capital market cycle, there are a couple of risk factors to Morgan Stanley that differentiate it from peers. The first is that the beginning of 2019 will mark the cessation of the retention agreements that were made with Smith Barney employees at the time of the acquisition. On the positive side, the company estimates that this could lower the compensation ratio by 1 percentage point, but it also will be a time when financial advisors are more likely to leave. We see the company's exit from the broker recruiting protocol agreement as having been a preemptive measure to try to reduce advisor attrition.A second jolt of reality that could occur in the wealth management business is that its operating margin expansion story could stall or reverse with a normalization of credit costs at the bank. Credit costs are close to pristine at all banks, but Morgan Stanley investors that aren’t accustomed to viewing the company in terms of traditional banking risks may be surprised by the eventual credit cost normalization. The company also isn't expecting much benefit from changes in the interest-rate environment on its net interest income that had been a driver of both revenue growth and operating margin expansion in its wealth management segment in recent years.