For years, Goldman Sachs Group Inc. (GS) was indeed the gold standard for Wall Street firms, while Morgan Stanley (MS) was not. Indicative of their relative status in 2009, Goldman's market value then exceeded Morgan Stanley's by about $50 billion, according to the Wall Street Journal. There since has been a significant reversal of fortune, however. For the year-to-date through Friday, Goldman's stock price is down 6.7%, while Morgan Stanley's is up 13.3%. Over the past 12 months, the respective figures are gains of 40.5% and 69.4%. Meanwhile, Goldman's lead in market cap has shrunk to less than $6 billion as a result.

Morgan Stanley Beats Estimates

For the second quarter, Morgan Stanley reported EPS of 87 cents, handily beating the consensus estimate of 76 cents and the year-ago figure of 75 cents, Barron's reports. Revenue was $9.5 billion, versus an estimate of $9.09 billion and a second quarter 2016 actual of $8.91 billion, Barron's adds. Improvement was broad-based, with revenue up in investment banking, equity trading and wealth management alike, the latter turning its best performance ever, Barron's says. In light of these results, Morgan Stanley announced a 25% dividend increase and has committed $5 billion to share repurchases. (For more, see also: As Morgan Stanley Hits Wealth Records, Analysts Ask How Long It Can Last.)

Goldman Stumbles

Meanwhile, Goldman has been hurt by the massive shift of trillions of dollars of investor money to passive mutual funds and ETFs, which has dampened its trading volume, the Journal says. Additional problems include decreased order flow from hedge funds and low market volatility that reduced demand for some of the complex derivative products that had been significant profit generators for Goldman, the Journal adds. Total trading revenue for the second quarter was down by 17% from a year ago, with fixed income revenue down by 40%, per the Journal. (For more, see also: Goldman's Rotten Trading Quarter Is a Familiar Smell on Wall Street.)

Better Risk Management

Goldman traditionally groomed savvy traders who would make winning bets on the market, and proprietary trading was a significant source of profits. Additionally, providing services to high-risk hedge funds was another major business for the firm, the Journal notes. After the financial crisis, however, increasingly risk-averse regulators promoted the Volcker Rule, which limits banks' freedom to seek profits from proprietary trading. This theoretically should present a major impediment to Goldman, yet the firm may be pushing the limits of the new regulations, but not with its historic success, according to Bloomberg columnist Lisa Abramowicz

By contrast, Morgan Stanley has eliminated 25% of its fixed income traders, forced the remaining ones to be more risk-averse, and expanded business units that produce steady profit streams while requiring minimal commitments of capital, most notably wealth management, the Journal says. Indeed, Morgan Stanley appears committed to the more conservative approach of limiting traders' exposures to the minimum positions necessary to service order flow from clients, to meet its obligations as a market maker. Despite, or perhaps because of, its more cautious stance, Morgan's Stanley's total trading revenue for the first half of 2017 has surpassed Goldman Sachs' for the first time since at least the financial crisis, the Journal notes.

More Client Assets

Goldman remains mainly an investment banking and securities trading firm, lines of business whose revenues are highly volatile. By contrast, wealth management revenues and profits tend to be stable, becoming even more so over time as clients migrate to fee-based accounts, while the old revenue model of commissions on securities transactions fades away.

Morgan Stanley's 2009 deal to purchase the Smith Barney brokerage and wealth management division from Citigroup Inc. (C) was a key turning point for the firm, vaulting it into a leading position in this segment of the financial services industry. Morgan Stanley currently employs 15,777 wealth management representatives, otherwise known as financial advisors, in 601 retail offices.

These representatives have gathered $2.239 trillion of client assets, per Morgan Stanley's second quarter financial supplements. The asset management division has an additional $435 billion of assets under management or supervision, per the same report, for a combined total of $2.674 trillion. Meanwhile, Goldman's investment management segment, which combines the activities of those two Morgan Stanley divisions, has assets under supervision of only $1.41 trillion, per Goldman's second quarter earnings release.

Bigger Profit Margins on Those Assets

Together, Morgan Stanley's wealth management and asset management divisions are on pace to deliver $4.6 billion of pre-tax profits in 2017 (by doubling the 2017 six-month figures). Goldman Sachs' investment management segment, by contrast, produced just $1.1 billion of pre-tax profits for the full year 2016, with end-year assets under supervision of $1.379 trillion, according to Goldman's annual report. Goldman's 2017 quarterly reports do not break out pre-tax profits for this segment.

Morgan Stanley thus generates more than four times as much pre-tax profits as Goldman from client assets in custody for two reasons. First, its asset base is more than twice as large. Second, its profit margin on those assets also is twice as large. Morgan Stanley has chosen to pursue a mass affluent clientele through its wealth management division, while Goldman has confined itself to more price-sensitive institutional clients and high net worth individuals.

More Profit Cushion

Through the first six months of 2017, Morgan Stanley's wealth management and asset management divisions generated a combined pretax profit margin of 24%, while contributing 49% of the firm's total revenues and 42% of its profits, per the firm's financial supplements. At Goldman Sachs, by contrast, investment management was only 19% of total revenues for the same period, per Goldman's second quarter earnings release. With the stabilizing influence of a broad wealth management and asset management business, Morgan Stanley seems better positioned than Goldman to ride out turbulent markets in the future.