And get started. For next stop, I'm delighted to welcome Co-President Andy Saperstein from Morgan Stanley. So, Andy, thank you so much for being here. And I guess before we can jump into the Q&A, there's a disclaimer that I need to read, I'm told, so I'll read this. I'll do my best. The discussion may include forward-looking statements which reflect Morgan Stanley management's current estimates and subject to risks and uncertainties that may cause results to differ materially. Morgan Stanley does not undertake to update the forward-looking statements. This discussion, which is copyrighted by Morgan Stanley and may not be duplicated or reproduced without its consent, is not an offer to buy any security. With that, I feel very scared asking any questions now.
All right. All right. I feel comfortable answering them now.
Perfect. So, first of all, thank you so much again for being here. Maybe you've been around the firm a long time. I think you've been a key architect of the strategy. There was a lot of discussion when we went through the CEO succession process, how the firm's going to deal with it. We are now one year into it. Things have generally evolved quite nicely from an investor standpoint. Give us a sense, one, it doesn't feel like there are big dramatic changes being made, but how you see how the last year has gone, and have there been actually any tactical changes, as you and Ted and others have thought kind of instituted?
Sure. So, look, the CEO change, you know, also from our standpoint, I think it's been a success by any measure. And we've got a lot of, you know, we've got a lot of praise for how it's gone. I think it's safe to say that it's pretty difficult and unusual for an organization after someone like James, who is clearly one of the greatest CEOs, not only just in financial services, but in any industry, you know, of all time.
And to make it go as smoothly as we have is terrific, and we're really proud of that. You know, one of the, I think the genius of James, in a way, is he knew when to leave and how he left, because we were effectively at an inflection point. We had just finished a series of acquisitions, whether it's Solium or E-Trade or Eaton Vance.
We had integrated them. We built out our strategic model the way we wanted it, and we were going on to that next phase of evolution. And that's, you know, that was the right time to transition. Ted is a phenomenal CEO. He's off to an amazing start, as we probably all would have imagined. In my view, he is absolutely the right guy to lead the organization. And to your point, we're a really tight-knit group. I love partnering with Dan. I think we all feel very fortunate that we get to do this together. We've had a lot of success together as a group for a really long time. We effectively grew up together in the business. We're close friends.
We just, look, we just feel really fortunate that we get to continue to work together the way we are and build out Morgan Stanley in the next phase. To your point, as to the strategy, that hasn't really changed. As I said, we're just off to the next phase of the evolution, more towards execution, optimization. We feel like we have the right set of businesses. We have the right business model. You know, and as for the new goal, which is a question that I think you were alluding to, ISG has always been what Morgan Stanley was known for right from the very beginning. Of course, there should be a strategic priority for ISG. And when you think about it, if I were to ask the folks in the room, what would that strategic priority be?
I think most people would have come up with the one that we did, which is to continue to grow that leadership position and continue to grow share. Last thing around that is, look, ISG is the engine. We've called it the engine. When ISG is hitting on all cylinders, good things happen everywhere. And that's why we talk about that integrated firm concept, which I'm sure we'll talk a little bit about.
Thank you for that. I guess maybe talking about the other engine where there's been a lot of focus from an ISG around NNA growth, net new assets. I think as we come through, there've been a mixed environment the last few years. And I think the question that I get often is, can they actually, I think the target is to grow about NNA 5%-7%. Just talk to us in terms of the backdrop that you see today to grow that. What could be the drivers that pushes it actually to the higher end over the next year or two?
Sure. I can ask that question also. I think it's a fair question. What you're getting at, I think, is how do I feel about our ability to grow organically now, and how do I feel about our ability to grow organically going forward, and what will be the magnitude of that growth? You know, the first thing I can tell you straight away is that I feel more confident now than I have felt at any period in our history of our ability to drive organic growth, that we have an engine that will continue to drive organic growth.
I'm sure we'll talk about the funnel, but if you think about that funnel, the more clients we have, the more assets we have, the more assets that we have, eventually those clients will, their lives become more complex. They'll look for advice.
They'll refer them to an advisor. They'll open up fee-based accounts, and that ultimately drives revenue. The timing of all that for any individual client depends upon their needs. And, you know, that's effectively what we refer to as the funnel. And that, in some respects, is the core to our strategy. What matters is our ability to attract new clients and our ability to deepen those relationships. So whether it's in any given year or whether it's any given quarter, whether it's higher or lower than the previous one, that's actually not how we think about the business. And anybody who talks to me will, I will tell you, that's not the way that you should think about the business either.
The way to think about it is, do we have an engine that's driving meaningful organic growth over a long period of time, and is that engine continuing to grow stronger? So let me give you, let me just give you a sense of what I mean by that and why in any given period, you can't judge the weakness, the strength of it, which I know is very tempting to do on a quarter-by-quarter basis.
In 2024, we took in more money from our clients than any other year, except for 2021. And it was effectively, by and large, the same magnitude as 2021. And in 2021, our NNA was $438 billion. The gross inflows from the two years, 2024 and 2021, were roughly the same. Now, the 2024 net result was lower, not because our engine, our ability to drive growth was weaker, but because outflows were elevated.
So the next thing on your minds would be, of course, there are circumstances where outflows being elevated would be concerning. This wasn't one of those years. For example, just to give you a sense of some of the idiosyncratic factors that led to higher outflows, as we know, rates jumped really high very quickly. Clients paid down debt that comes out of their accounts.
Similarly, clients' spending was elevated. We know that between inflation and other factors, and they weren't borrowing for that spending. I could go on and give you some other factors, but I think you get the message. There were some idiosyncratic reasons why in 2024 there were elevated outflows that wouldn't be concerning. It's part of the environment. It's part of life. So while you might see a net new asset number that's lower, our ability to drive assets was as high as ever.
To be perfectly honest, we were very happy with the fact that we were able to drive gross assets, gross new assets the way we did in 2024, because compared to 2021, 2024 was actually a worse environment for driving new assets, given the capital markets activity that we saw in that year. So, long way of saying, you know, look, the growth engine, the client value proposition is as strong as ever. Our focus is always on that funnel that I described, our ability to drive new clients and then deepen those relationships throughout the funnel. I haven't been as bullish about our ability to grow organically as I am today.
That's hopeful. That's good color. I guess tied to that and tied to the funnel, I think Sharon mentioned an interesting stat on the fourth-quarter call about $3 billion of inflows coming from the workplace channel. Just talk to us in terms of the optimization of that funnel, where I talk to investors where, in my mind, Morgan Stanley is still in a nascent stage of all these integrations that have happened. So is that funnel fully optimized? Where do we stand today? And just the journey in terms of the path to advice, like how quickly can that happen?
Great, great. A lot of questions in there, really important ones. Let me unpack them. Look, things are accelerating. Our ability to drive assets through the funnel is accelerating. Why? Because it's still relatively early days for us in, you know, think about the workplace as an example. It's still early days. We're still learning a lot about how do we deepen those relationships.
And the better we get at it, the faster we can drive the throughput. I described the funnel. It's more clients. Last year, we brought in a million, more than a million more clients. Now we have 19 million relationships and growing fast. And then the key is, to your question, can we continue to deepen and strengthen those relationships? As Sharon mentioned, we've driven $300 billion of net new assets into the advisory channel from the workplace channel. That's a number that we released.
The way to think about what that means is that that $300 billion of net new assets were tied to relationships that we made through the workplace. In other words, we wouldn't have had those clients. We wouldn't have had those relationships if we didn't have the workplace channel. You have to also remember that once those clients get to an advisor, they continue to grow from there. The net new assets that they bring over there is just the tip. I guess tip of the iceberg is probably the worst bad analogy, but you get what I mean. The $300 billion is actually an understated number. Today, those relationships, if you just look at those relationships, they have assets that are part of the overall Morgan Stanley assets that are multiples of that $300 billion.
Over time, as you follow this out, over time, the proportion of assets that originate from the workplace and self-directed will continue to grow. And that's a really good thing because when it comes to organic growth, what we're doing is we're augmenting the growth that advisors would have created themselves. And that gets back to the original question, which is that drives our ability to create organic growth.
Got it. I guess augmenting the growth that the advisors are bringing, as someone who sits at the institution, I do. I talk to Merrill advisors all the time. And it started begrudgingly, but I think they've come around to accepting and actually enjoying being part of a bank and being able to have a wider breadth of products that they can kind of offer to their clients. It's interesting in terms of, I think Morgan Stanley strategically is growing the bank. Give us a sense of what's needed. I mean, I'm sure there's a lot of back-end technology to make this process seamless. Where do things stand on that front? And should we think about it as primarily a tool to widen the relationship, or could it actually be a client acquisition tool?
Yes, I agree. I'm glad you asked that question. Look, it certainly could be a client acquisition tool, for sure. Primarily, I would say right now, it's to deepen the relationships, but there's also a path to new clients through the bank as well. I'm glad you asked about the bank because if you think about our bank's place within wealth management, and this I think goes for every wealth management organization out there, over the past couple of years, all of the focus on the bank was just around sweep deposits as rates kind of whipsawed all the way down to zero and back up again.
The entire focus when it came to the bank was on net interest income. What would happen to those sweep deposits? Would they stabilize? And if they stabilize, would that also stabilize net interest income? That question is now behind us.
And we can actually get back to thinking about the bank the way the bank should be thought about, which is a core part of the overall value proposition of what FAs bring to their clients. A lot of our clients now use us as their everyday bank. That's a number that's growing. And that's a good thing because we've spent a lot of time and energy over the past few years building out the capabilities of the bank.
For many years, we didn't have the full suite of banking products and services, and that's what we focused on over the past couple of years. Now we have everything that you could possibly need, I guess, other than the fact that we don't have branches on every street corner. We have the same capabilities as any other bank. I don't have another bank. Morgan Stanley is my bank.
There's nothing that I can't do other than I can't walk into a branch on the corner. The penetration of our clients, though, because we started late relative to competitors, we're underpenetrated with our clients and their banking needs relative to others. There's a good and bad to that. We're smaller. Our bank is smaller than, for example, Merrill, which you alluded to. On the other hand, our clients have the same banking needs as any other clients. And as they need to borrow money, they'll go to their advisor. They do go to their advisor. We lend them money. So our growth should be stronger because eventually we'll get to the same level of penetration. And that's what we're seeing. We'll lend them money. We'll get up to that level of penetration.
And when it comes to the two things that drive net interest income , sweep deposits and lending money, which is the core of what wealth management banks do, our sweep deposits should grow in a stable fashion, steadily as assets grow. And of course, we'll continue to make loans, which should grow in line as well.
Would you say, tied to that penetration, the willingness of the advisors to be on board with this, has it been better as expected? Or does it take a little bit more of incentivizing to know?
Yeah. No, advisors embrace, all advisors in the industry embrace that. Advisors want to deliver everything the client needs, and clients need to borrow money. And the last thing an advisor wants is for their client to borrow money from somewhere else. So it's a core part of what it takes to properly serve a client.
Maybe just switching to, in terms of the profitability of the business, I mean, I think the pre-tax margin is fast approaching the 30% target that you'll have. Just talk to us. To me, I think profitability matters, but the resiliency also matters. Just talk to us in terms of investments that are being made to make that sort of resilient once you get there. And what prevents you from getting there?
Right. Yeah. So I love the way you asked the question. Look, obviously, as you phrased the question, we're completely confident in our ability to get to the 30% number that we put out there. Truthfully, the margin target isn't something that we think about on a day-to-day as we run the business. It doesn't impact our decisions because we effectively run the business knowing that we'll eventually pass it.
And if that had been our goal was to get to 30% as fast as possible, we obviously would have passed it already. The investment that you're talking about, that's key to all of this. So we have a very healthy level of investment right now in our run rate. We're investing now to make sure that we're growing in the future. That's investing in support for advisors. That's investing in technology, including AI.
It's investing in new businesses like the workplace and family office and privates. It's investing in innovation. The good news for us is that we've been innovating for so long and investing for so long. Like I mentioned, it's already in the run rate. So we're actually in a good, almost, I would call it almost a steady state scenario where we're going to, just by our growth, we'll go through 30% margins, and we'll do it the same way that we did when we passed 15%, when we passed 20%, when we passed 25%, and ultimately 30%. It'll just be driven by growth.
That's interesting, and I think I debate this with investors a fair bit when we think about the competitive landscape as intense, and in my view, you've built something which is hard to replicate as a franchise in terms of all the different pieces. Just talk to us about the competitive landscape when you think about how intense it is? Who do you see as your biggest competitors for the franchise?
Sure. Well, look, we describe ourselves as a category of one. I'm sure you've all heard us say that. So why do we say that? Competitors don't have the scale that we have across every channel. And not only don't they have the scale that we have across every channel by definition, then they don't have it where all the channels work together. Do we have strong competitors in any one of the channels? Of course we do.
But like I say, they don't operate across all three. And that is our important differentiator. That's the secret sauce. That's why we call ourselves the category of one. It's the way those channels work together. In some respects, when I define the funnel, that's a great example of the power of the organization and the reason why we're able to generate that outsized growth. It doesn't happen overnight.
We've been thinking about that. We've been building it over a long period of time. That's why we spent so much energy and time and money integrating the channels the way that we have, including the technology to make sure that the client experience is seamless. Our ability to integrate acquisitions and systems and platforms, that's core to our value proposition. And it's also what I think would make it very difficult for somebody to replicate what we have at scale. There's probably another aspect to your question that I should also address. In our view, we've reinvented the business of wealth management.
And in doing so, we've cemented the partnership between the firm and our advisors because of the way we support their ability to grow, because we support their ability to scale, and by partnering with them, and also by augmenting their growth with the type of referrals that we've done. We put to bed the idea that all firms and all platforms are the same.
And look, so if NNA is any indication, you can absolutely grow faster at Morgan Stanley than you can anywhere else. And our FAs are delivering much more to their clients by tapping into those resources and the special services and the technology that we offer. And that's why you see the best FAs migrating towards our firm. And look, in some respects, people say, "Why do you call yourself a category of one?" It is because the business model looks different.
When I say that we grow, you can grow faster at Morgan Stanley, it's not an opinion. The facts support that.
That's fair. I think talking about category of one, differentiated business model, I think Parametric was a good addition when you did that. Just talk to us, if you don't mind, going back a little bit back in time, remind us the capabilities it brought to the firm, the differentiation it brought, and areas where you're investing within that business today.
Sure, sure. Good. Pleasure to ask about Parametric. Look, if you look at the history of asset management, it went from stocks and bonds to mutual funds to ETFs to SMAs, and now it's customized SMAs through direct indexing. And if you think about that evolution, technology really drove every phase of that evolution. It enabled you to do new and better things for clients every step of the way. Direct indexing and customization with all the tax advantages that come with it, in my opinion, that's the present and that's also the future, and Parametric, to your point, is the industry leader in the space. Right now, Parametric has $575 billion in assets. That's multiples higher than our nearest competitor, and it's growing really fast. It's grown by nearly $200 billion since the close of the acquisition.
It's not a surprise when I say that Parametrics are a real priority for us. Our goal is to become the custom indexer, for lack of a better phrase, for the industry. We're well on our way to doing that. We've widened our partnerships. We've lowered our minimums. We've made the platform much more democratized and accessible to a wider range of clients. You might have seen a lot of our recent announcements in that regard. We've made amazing progress in the wealth management channel. Usage is up 3x since the acquisition. Using Parametric, not surprisingly, has become a core part of the business, the way FAs do business for many of our FAs across the channel. Now we're focused on expanding our distribution to third-party channels.
Got it. I guess the other team, or at least it feels like when you talk to FAs and other than the industry, alternatives is a big focus in terms of distribution of alternatives. Just talk to us how you're approaching it within both sort of the wealth and investment management business.
Sure. So let's talk about MSIM, and then we'll talk about wealth management. In MSIM, our franchise has more than doubled since 2018. Now we're at $240 billion. The key to the growth at this point will be distribution.
So because we've already done what I consider to be the hardest part, which we've built really attractive products in some of the fastest growing areas, and those products have terrific track records, but they're punching below their weight in terms of the assets that they've generated given the performance, so what we're doing is we're making key strategic investments in distribution globally, which should drive the assets and reward us for the performance that we've already created in those products. If you think about Alts in our wealth management platform, as you know, we're already the largest distributor of Alts in the U.S.
And we believe that we're widening that gap every single year. So obviously, our clients love the differentiated platform that they can access from the platform, the types of products that they can get from the platform. And because we're the largest, not only do the leading asset managers look to get onto our platform and give us exclusive access and some really exciting products, but because you can get it at Morgan Stanley, all the best FAs in the industry who incorporate Alts into their practices, they also want to be part of the organization.
One way just to think about the growth potential of Alts in the wealth management platform, right now we have a little bit over $200 billion in alternatives in the wealth management platform. That's around 5% of qualified assets in our system. Our Global Investment Committee recommends an allocation of 15%.
So if you think of it that way, we can triple the amount of assets that we have, even if, or add another $400 billion of alternatives. And that's even if our assets don't grow from the point where we're at right now, which is obviously not the case. So there's a lot of opportunity there for growth.
Got it. I guess going back, you referenced earlier the integrated firm. Just give us a sense of how that strategy has evolved with obviously all these acquisitions when you put together over the last five years, where you are in terms of integrating the firm and bringing the whole bank, I guess, to the customer?
Yeah. So listen, if you think about the theme of all of the answers that I've given so far, integration, the way in which different pieces of the organization work together is the key. That's something that I think people underestimate sometimes is it's the ecosystem. It's the model. The power of Morgan Stanley overall is that actual business model and the way the businesses work together. And there are a few aspects of that. First is what we learned from all the acquisitions that we've done. We spent a lot of time and money, as I mentioned, integrating them. In my opinion, one of the main reasons that acquisitions fail in any industry is because they don't do the tough work to integrate them and capture the synergies that way. Synergies come from that integration.
When you combine that in Morgan Stanley with the culture and a team that's worked together for so many years, the concept of an integrated firm should come as no surprise to anybody because that's the natural output of all that. So what occurred to us as we thought about ways in which we could drive future growth, untapped opportunities for the overall organization, what we realized is that we do see wins anecdotally where we deliver the entire firm to the client. And when we do, the client is thrilled, we're thrilled, but those are somewhat anecdotal. In other words, for every one that we got right, there was another one where we probably could have delivered more of the firm to the client and therefore we could have served them better.
Our goal is to make sure that our clients get the best possible solution from Morgan Stanley, leveraging everything that Morgan Stanley has to offer every single time, and so let me give you an example which shows you how unique Morgan Stanley is in that regard. We're the only firm that can deliver services cradle to maturity where we grow with a client at every phase of their life cycle.
So think about what we can do for a private client. We can offer them a self-service cap table solution. When that private client becomes more complicated and their needs become more sophisticated, we can offer private markets capabilities like tracking different share classes and facilitating liquidity transactions like tender offers. By then we have a deep relationship with them even before we go public, and we've really developed a relationship where we know them very well.
When it is time to go public, obviously we have a world-class investment bank that can help them with that transaction. With Workplace, we can also seamlessly transition from private cap table manager to public equity plan administration because we have that capability. That's precisely why Carta was excited about that partnership with us and why we're so excited about the partnership that we just did with Carta that will not only add to our funnel, but it'll obviously augment IPOs that will accrue to our investment bank.
We can offer DSP. We can advise on their 401(k) plan and investment options. We can manage the corporate cash. We can deliver financial wellness. We can manage the individual wealth of the employees up and through retirement. That's a really powerful way to have a relationship with a client over time where we grow with them as they grow. We should do that every single time.
Got it. I guess part of that journey from cradle to maturity was the E-Trade platform. Talk to us around how that platform has evolved as being part of this integrated firm as opposed to being standalone. You often hear in terms of how some of the upstarts have been more appealing to the younger generation in terms of how they buy and sell stocks. How do you think about E-Trade competing with some of these firms and how well positioned is it?
Sure. Sure. So let me start by reminding everyone why we bought E-Trade and what we got when we bought E-Trade. First, E-Trade had a leading workplace business that we integrated with Solium and our advisor channel to create massive synergies. That's what created our powerful workplace channel. People forget about E-Trade's workplace business a lot when I talk to them.
The beauty of the combination was that E-Trade didn't have any way to monetize their workplace business. Together, those businesses became significantly better. I guess one way of saying it, in my view, is that that alone would have been enough to call the E-Trade acquisition a home run, just putting together the workplace businesses and linking it, integrating it with the advisor channel. Second, when we bought them, we bought a world-class technology platform. It serves as the foundation for both the self-directed and workplace businesses.
And it's also enormously helped complement our advisor-led platform. And then, of course, on top of all of that, we got their self-directed business, including the iconic E-Trade brand. And I can tell you for sure, we wouldn't have been able to penetrate that channel on our own. That's just a fact. We had been at it for years. We wanted to penetrate the direct channel. It would have been impossible to do it as a standalone organization.
And now, of course, we're a major player. Because of those synergies of the various channels in our scale, the last thing when you think about the value to the E-Trade deal is we were able to invest in E-Trade and build out their capabilities at a level that E-Trade never would have been able to do on their own. And as you know, we invested heavily in the platform.
Just recently, E-Trade was ranked number one, the number one web trading platform by StockBrokers.com. The capabilities are better than they've ever been. And we aggressively make sure that E-Trade clients get benefits from E-Trade being a part of Morgan Stanley. So the question when it's asked to me was the E-Trade acquisition of success, was the E-Trade acquisition a success? It was a resounding success. It provided us significant value in many more ways than people realize, which is why I wanted to take you all through each of the pieces of E-Trade so you can understand exactly where all that value came from.
Do you think the business is set up right now to attract the younger generation who are kind of early in the stage of wealth creation?
Yeah, that's exactly. That's a big part of the strategy. When I talked earlier, I'm glad you mentioned it. When I talked earlier about our ability through Workplace and through Self-Directed to deepen relationships with a different client segment and then augment advisor growth by referring those clients to the advisor channel, that's precisely what I meant. We now have a deep penetration into what's on average a younger client segment that's in their wealth accumulation years.
Got it. I guess if I could follow up on one thematic topic. It's not here, just around talk to us about your strategy, the United States versus international, be it across wealth management, E-Trade, how you look at that opportunity, Sid.
Sure. Sure. So we have basically a large and strong international business, as you know. It's offshore. It's in LATAM, Europe, Asia. In those countries, clients have increasing needs to do business in the United States. And for a long time, that's been a fast-growing business for us. We have a partner, a very strong partner in Japan, in MUFG. We've been able to successfully engage in some really powerful joint ventures with them. I expect that to continue. And in various pockets where we do business, we've been able to penetrate the markets real well. We're exploring ways, whether it's leveraging E-Trade or leveraging our knowledge or whether it's leveraging either existing or new partners. We're looking for ways to expand internationally as well.
Got it. I guess we have a few minutes left. One last question just around, as we think about the tech strategy, I mean, including we just hosted a panel before this discussion on the impact of AI in financials. I mean, one, I think holistically, talk to us around where the investments are going in tech and how meaningful can AI be for the firm?
Sure. So, wow, too bad we only have a few minutes left. We could talk about this for a while. Look, as I think you know, we were a very early mover in AI. We signed a contract with OpenAI well before they became a household name when nobody had heard of them. We've been working in partnership with them and now with other partners as well to roll out AI capabilities in the wealth management channel, like I say, for a couple of years now.
And the adoption rates for the new technology, as you might imagine, have been really, really impressive. The demand for AI and new technology throughout the organization and the field has been quite strong. Why? Because it makes people much more productive. It makes advisors much more productive. It gets answers to advisors' questions much faster.
It ultimately means that advisors can do what they do best, which is to spend more time with clients. What we're doing now is, we're expanding those capabilities across the rest of the firm, and we built out an AI, I would almost say an AI organization, which has centralized governance to make sure that we're rolling it out as quickly as possible across the entire organization, and I think it's working really well. The exciting part about it and the way in which we've approached it is that a lot of the idea generation comes bottom up. For example, we run hackathons. I had never heard of that word before we started running it, but we run hackathons.
And this not only helps us to get better ideas, but because great ideas come from people who are throughout the organization, people who touch clients, people who understand at a very granular level what goes on every single day, but it also helps with buy-in because you're giving people what they asked for at the time that they asked for it, so, as you can imagine, as with all things, we monitor a tremendous number of metrics, whether that's penetration, whether that's usage, whether that's efficiency, and ultimately revenue productivity.
When people talk about tech or AI in particular, they ask whether it's a threat or an opportunity. I know that that's the big question that's always on everybody's minds. We approach it in a different way where we embrace the threat. That's our philosophy is to embrace that threat, and in doing so, we're an early adopter.
Our business model centers around relationships with clients. It's not only wealth management. It's across Morgan Stanley. Our business model is centered around relationships with clients, providing advice. If technology can make us more efficient and more effective, we embrace it because it makes us much better at serving those clients. That's a recipe for success.
With that, Andy, thank you so much for your time this morning.
All right. Thank you.