Fierce competition in the discount brokerage space, part of the wider North American wealth management industry, continues and one result is yet another mega-deal, this time between Wall Street's Morgan Stanley and E*TRADE.

Morgan Stanley is buying discount brokerage E*TRADE in a move that follows last year’s Charles Schwab/TD Ameritrade deal and highlights how competition in this financial sector is intense.

The all-stock transaction is valued at about $13 billion, Morgan Stanley said in a statement yesterday. The acquisition is subject to customary closing conditions, including regulatory approvals and approval by E*TRADE shareholders, and is expected to close in the fourth quarter of 2020.

Shares in Morgan Stanley fell yesterday by about 3 per cent as at 10:45 GMT; shares in E*TRADE, on the other hand, were up by a whopping 26 per cent. 

The US investment banking firm is pushing towards the retail wealth management space, illustrating how firms want to capture assets as Baby Boomers pass them on to succeeding generations.

Morgan Stanley said that the E*TRADE acquisition will “significantly increase the scale and breadth” of its wealth management franchise. It also “positions Morgan Stanley to be an industry leader in wealth management across all channels and wealth segments”.

E*TRADE, formed almost 40 years ago, has more than 5.2 million client accounts with over $360 billion of retail client assets, adding to Morgan Stanley’s existing three million client relationships and $2.7 trillion of client assets, Morgan Stanley said.

“E*TRADE represents an extraordinary growth opportunity for our wealth management business and a leap forward in our wealth management strategy. The combination adds an iconic brand in the direct-to-consumer channel to our leading advisor-driven model, while also creating a premier Workplace Wealth provider for corporations and their employees,” James Gorman, chief executive and chairman of Morgan Stanley, said.

“In addition, this continues the decade-long transition of our firm to a more balance sheet light business mix, emphasising more durable sources of revenue,” he said.

Some media commentary suggested that such a big acquision might raise regulatory eyebrows due to possible excessive market concentration, something that the raft of post-crisis rules enacted by Washington were designed to avoid.
 

Pivot to wealth
Gorman’s last comment plays to a theme across the banking world of firms reducing risk exposures and adding revenues from wealth management, which are typically less volatile. Investment banking is also a capital-hungry business and firms such as Goldman Sachs, HSBC, UBS, Credit Suisse and Deutsche Bank, among others, have cut exposures. This week, HSBC said that it was cutting some of its investment banking activity - in the US and Europe for example.

When the E*TRADE deal is complete, the combined wealth and investment management businesses of Morgan Stanley will contribute around 57 per cent of pre-tax profits, excluding potential synergies, compared with only about 26 per cent in 2010. Such a shift also shows how far Morgan Stanley has come after it was battered by the 2008 sub-prime mortgage market crash.

The trend to diversify is strong. Last year, Goldman Sachs bought the RIA United Capital – a clear move towards wealth management. Morgan Stanley, like Goldmans, does also look after ultra-high net worth and HNW clients; the E*TRADE acquisition is more of a drive into the mass-affluent space. 

Last year Charles Schwab announced that it was buying TD Ameritrade in a $26 billion transaction. Discount brokerage competition is fierce. The rise of low-cost “passive” investing entities such as exchange traded funds, driven by resistance to higher-cost actively managed funds after a long bull market, and regulatory costs, has squeezed margins. At this end of the financial field, pressure for consolidation and more efficiency is intense.

As part of the transaction, Mike Pizzi, CEO of E*TRADE, has joined Morgan Stanley and continues to run the E*TRADE business within the Morgan Stanley franchise and lead the integration effort. Pizzi will report to Gorman and join the Morgan Stanley operating and management committees. 

Cutting-edge
“Since we created the digital brokerage category nearly 40 years ago, E*TRADE has consistently disrupted the status quo and delivered cutting-edge tools and services to investors, traders, and stock plan administrators,” Pizzi said.

The combination, the firms said, will “create a leading player” in Morgan Stanley’s Workplace Wealth suite of offerings, combining E*TRADE’s US stock plan business with Shareworks by Morgan Stanley, a provider of public stock plan administration and private cap table management solutions. 

“This combination will enable Morgan Stanley to accelerate initiatives aimed at enhancing the workplace offering through online brokerage and digital banking capabilities, providing a significantly enhanced client experience,” Morgan Stanley said. 

Cost savings
Morgan Stanley said that the firms will achieve about $400 million in cost savings by efficiencies in technology, by blending banking facilities, and by funding “synergies of about $150 million from making optimum use of E*TRADE’S approximate $56 billion in deposits. 

“Morgan Stanley will be better positioned to generate attractive financial returns through increased scale, improved efficiency, higher margins, stronger returns on tangible common equity, and long-term earnings accretion,” the bank said.