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 2020, the company reported a record $48.2 billion in annual earnings, compared with $41.4 billion the prior year. This represents an increase of 16% year over year. On Jan. 20, 2021, Morgan Stanley reported Q4 earnings with revenues of $13.6 billion, compared with $10.9 billion in the prior year, and net income up 22%, respectively.

Key Takeaways

  • Morgan Stanley is a leading global investment bank and wealth management firm, employing more than 60,000 people worldwide.
  • The company makes money primarily from three main units: institutional securities, wealth management, and investment management.
  • In 2020, the company recorded record revenues and profits.

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 record net revenues of $25.9 billion in the fiscal year of 2020.

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 the fiscal year of 2020, investment banking revenues were up 46% and sales and trading were up 32%, compared to 2019.

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 around 3.5 million people and they have over $2.3 trillion in 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 2020 were up from 2019 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 $19.1 billion with a pre-tax margin of 23%.

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 2020, the Investment Management division's net revenues were $3.73 billion. In 2020, asset management revenues hit a record $781 billion, reflecting higher asset levels and positive flows.

Net revenues in the Investment Management group come from two places– Investments and Asset Management–both of which went up in 2020. 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.