(Dow Jones) Morgan Stanley's plan to boost profit at Wall Street's biggest brokerage firm has one major obstacle: retail investors.
While the investment bank's trading business is firing on all cylinders again, the "flash crash" dealt its wealth-management unit--an anticipated source of future growth--a blow, as spooked clients removed $5.5 billion in the second quarter.
One of the main reasons a pullback among retail clients is damaging for Morgan Stanley is about 35%-40% of the investment bank's quarterly revenue comes from its wealth-management business. The bulk of the remaining revenue comes from the institutional securities group, which includes investment bankers and traders.
Morgan Stanley and its chief executive, James Gorman, have bet heavily on an army of roughly 18,000 brokers helping to generate a stable source of revenue. But with the company on track to miss broadly on at least one key target for its Smith Barney joint venture, the timetable for that payoff is in question.
"You have a company that is going to be suffering through a retail drought and incurring one-time expenses as they put technology [for the brokers] in place," said Sanford C. Bernstein analyst Brad Hintz.
With those obstacles, Hintz called Morgan Stanley's stock a "value trap," saying that the company's share price could "sit for a while until the skeptical investor says 'OK, Gorman is going to be able to deliver on his promises.'"
Shares of Morgan Stanley recently traded up 0.4% at $27.10 and are down 8.5% year-to-date.
A tough operating environment would stand to affect other firms that cater to retail investors such as Bank of America Corp.'s Merrill Lynch, which is Morgan Stanley's main rival within the brokerage industry. However, Merrill has boosted margins and other metrics including asset-management fees and brokerage income for Bank of America's wealth segment from a year ago. It also is fully integrated with the roughly 2,000 advisors who worked at the commercial bank prior to the deal.
Morgan Stanley has said it wants to generate a 20% pretax profit margin from the wealth-management business, along with $1.1 billion in cost savings. Through the first six months of 2010, the margin is 7%, and executives said the company may "push out" its original projection over a longer time frame.
The investment bank also originally forecast $14 billion in combined revenue from the business after integration, far above the $3.1 billion the unit posted in the recent quarter.