Morgan Stanley

NYSE:MS

Earnings Call Transcript 2021-Q4

[Operator]

Good morning. On behalf of Morgan Stanley, I will begin the call with the following disclaimer.

During today's presentation, we will refer to our earnings release and financial supplements, copies of which are available at morganstanley.com. Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release and strategic update. Within the strategic update, certain reported information has been adjusted as noted. These adjustments were made to provide a transparent and comparative view of our operating performance against our strategic objectives. The reconciliations of these non-GAAP adjusted operating performance metrics are included in the notes to the presentation of the earnings release.

Morgan Stanley closed its acquisition of E*TRADE on October 2, 2020, impacting annual comparisons for the Firm and Wealth Management and closed its acquisition of Eaton Vance on March 1, 2021, impacting period-over-period comparisons for the Firm and Investment Management. This presentation may not be duplicated or reproduced without our consent.

I will now turn the call over to Chairman and Chief Executive Officer, James Gorman.

[James Gorman, Chairman & Chief Executive Officer]

Thank you. Good morning, everyone. Morgan Stanley delivered another record year of profits and results in 2021, generating a full year ROTCE of 20%. Performance was strong in each business. In Institutional Securities, we showed strength and gained share. And in Wealth Management, we added over $430 billion of net new assets, bringing total client assets to nearly $5 trillion. We drove our strategic vision forward Investment Management, successfully closing our acquisition of Eaton Vance in the year and created a premier asset manager, which itself has $1.6 trillion of assets under management.

Sharon will discuss the details of the quarter and the full year shortly. But first, as always, I will walk through our annual strategic updates. If you turn to the document and start on Slide 3. At the beginning of last year, we set 2-year objectives with the expectation that 2021 would be a transition year as we work through our integrations. Clearly, the Firm's performance exceeded the expectations we had for 2021 heading into that year. With the early successes of the E*TRADE and Eaton Vance acquisitions and the Firm's overall momentum, we entered 2022 ahead of plan.

Turning to Slide 4. First, I'll focus on our 12-year transformation and where the Firm is today. History offers perspective on our track record. Next, I'll highlight where we've built unique competitive advantages around each of our businesses and how we expect to grow and maintain our leading positions. Then I will address our continued commitment to return capital to our shareholders. And finally, I'll touch on how, when taken together, this should lead to further multiple expansion.

To begin with our longer-term evolution, Slide 5 highlights the transformation of Morgan Stanley into a more balanced, higher returning Firm today. Total revenues are more than double the level of 2009 with each business significantly growing and contributing to the Firm's enhanced profitability. Each of our businesses now have defensible and sustainable competitive advantages to protect and drive their leading positions.

Start with Institutional Securities on Slide 6. Looking back to 2014, when we had recovered from the financial crisis, but before we reset our strategy and restructured some of this business, we've increased share both overall and individually across business lines. Share continues to aggregate to the industry leaders, and we expect this trend to hold. Our competitive position is strong, and as demonstrated in the very active markets for the last 2 years, we are confident in our ability to capitalize on opportunities to hold, if not gain, share across the division.

Moving to Slide 7. Our integrated investment bank delivered $30 billion of revenues in 2021 and continues to demonstrate operating leverage, highlighted by our expanding margins. Our footprint is balanced around the world, putting us in a leading tier of investment banks with global scale. Our franchise has never been stronger, and we have seen tangible results from the collaboration between our segments.

Shifting to Wealth Management on Slide 8. The growth we have seen in 2021 has been unprecedented. We added nearly $1 trillion in client assets in a single year. Scale advantages propelled growth, and we added $438 billion of net new assets in the last 12 months. This predominantly organic growth is the result of our consistent and focused execution on our integration and expansion initiatives and puts us in a leading position.

The journey over the last few years has demonstrated the out of the possible. With respect to net new asset growth, this business has gone from very low single digits in the last decade to 4% to 6% more recently to unprecedented growth this year. Obviously, it's still early days but the verticals are in place. Before we commit to specific guidance for net new asset growth, we need more time to better understand the power of these channels. But what I can tell you is that the proof points are strong, and we feel great about where we are today in the business potential.

Turning to Slide 9. With the top advisor-led business in the industry, complemented by leading workplace and self-directed offerings, the wealth franchise we've built as a category 1. We already serve nearly $5 trillion of client assets, and overall revenue on assets remains high over 50 basis points. Underlining this segment is -- underlining this segment as an economic engine for the Firm.

As we think about the growth ahead, we are most excited about the nearly 15 million relationships we have across channels and the potential to deepen those relationships further and consolidate clean assets under the platform.

On Slide 10, we look more closely at workplace, which I'm incredibly excited about for the future. As we've said before, we see this channel as a funnel for client and asset acquisition to sustain growth going forward. We now have over $500 billion of unvested assets in this channel and expect to retain an increasing proportion as they vest. In 2021, we had a 24% retention rate. That compares with 21% the previous year. Given our focused effort, our long-term goal is to reach 30% retention. This new metric illustrates the strength of the workplace business to augment net new assets to Wealth Management.

Moving to Investment Management on Slide 11. Our platform has transformed into premier and growing asset manager. Our distinctive capabilities enable us to deliver differentiated client value as endorsed by $115 billion of net flows in the year. Total AUM is now $1.6 trillion, and our more durable asset management fees are nearly triple what they were in 2014.

If you look closely with our Investment Management business on Slide 12, you can see we're a leader and growing where it matters most. Customization, specifically direct indexing through the premier Parametric brand, sustainability and alternatives are each areas of increasing client demand. We've strengthened our position across these categories with robust investment our capabilities, and we've seen meaningful asset under management growth as a result.

Moreover, the complementary nature of distribution networks with Eaton Vance's powerful U.S. retail distribution capabilities and MSIM's strength in international distribution enhances our client reach. We're encouraged by early signs of success in leveraging the greater combined network, along with our world-class equity franchise and value-added fixed income platform, and we expect these areas will continue to drive growth into the future.

Finally, on Slide 11, as we look ahead, we expect rates to rise. We expect approximately $500 million of incremental NII in Wealth Management this year based on the year-end forward curve. Additionally, we expect another $200 million this year from the reversal of fee waivers in our Investment Management business.

To further measure our rate sensitivity, we look at what happens if there is an incremental 100 basis point parallel shift in rates beyond the curve. That would deliver another $1.3 billion, which largely goes to the bottom line. While we certainly don't expect this additional shift to happen this year, the Firm will clearly benefit substantially as rates rise over the next several years.

Pivoting to our capital return strategy on Slide 14. Our increased earnings power, supported by revenues from more durable sources, has enabled us to double our annualized dividend to $2.80 just last year while, at the same time, executing on meaningful share repurchases. Notwithstanding the returns we're making to shareholders and the investments we make in our business, we continue to have an excess capital position. Our CET1 ratio was 16% at year-end after paying our dividend, executing on our repurchase plan and accounting for the impact of SA-CCR.

And as further illustrated on Slide 15, a growing net income has provided us the flexibility to reduce our share count. While we added 300 million shares from our 2 large acquisitions of E*TRADE and Eaton Vance, we continue to execute on our meaningful buyback program and have brought back our share count back to just under $1.8 billion from $2 billion in 2014.

Taking all this together, Slide 16 highlights the fundamentals we have in place to drive future multiple expansion. We have scale, significant growth opportunities in wealth and investment management, coupled with a leading institutional business, and a strong commitment to capital return. The Morgan Stanley brand has never been stronger. We've been fortunate enough to acquire additional brands in the last few years that have tremendous value in expanding our footprint. The sum of these elements supports multiple expansion for the combined company.

Slide 17 shows our performance goals. Of note, we are increasing our ROTCE goal to reflect the earnings power we see in our business model. We are laser focused on delivering value to our clients, our shareholders and our employees, and we believe an ROTCE in excess of 20% is achievable. As we look to the longer term, with the support of our track record behind us, we're adding a new goal, a long-term goal to achieve $10 trillion in client assets across Wealth and Investment Management.

As always, our targets are subject, of course, to major market moves or changes in the economic, political and regulatory environment. However, with the outlook we have now, we fully expect to achieve our goals.

I'll now turn the call over to Sharon, who will discuss our fourth quarter and annual results. And together, we will take your questions. Thank you.

[Sharon Yeshaya, Chief Financial Officer]

Thank you, and good morning. The Firm produced record revenues of $59.8 billion in 2021 and ended the year on a strong footing with fourth quarter revenues of $14.5 billion. All 3 businesses contributed to the extremely strong full year results, reflecting high levels of client engagement and active market. Excluding integration-related expenses, our ROTCE was 20.2% for the full year and 20.4% for the fourth quarter, and EPS was $8.22 and $2.08, respectively.

Even while investing in our business, we continue to demonstrate operating leverage led by Institutional Securities. The full year efficiency ratio was 67.1%. Excluding integration-related expenses, our full year efficiency ratio was 66.3%, down from 68.4% in 2020. Total expenses in the year were [$40.1 billion]. The increase in total expenses versus the prior year reflects the addition of E*TRADE and Eaton Vance and the integration-related costs and higher compensation on higher revenues.

Now to the businesses. Institutional Securities delivered excellent full year performance with record revenues of $29.8 billion. In the fourth quarter, revenues were $6.7 billion. Our integrated approach, global footprint and balance across business lines continues to distinguish our model.

Underscoring the operating leverage in the business, pretax margin was 39.6% for the full year, increasing from 34.6% in the prior year. Investment Banking revenues were a record $10.3 billion for the full year. While each business delivered record results, Advisory and Equity underwriting led the year-over-year improvement. Corporate clients actively pursued strategic opportunities and sponsor-deployed capital. IPO issuances were exceptionally robust in the year. And from a geographical perspective, results were led by the Americas, along with sustained strength in EMEA.

Fourth quarter revenues of $20.4 billion -- excuse me, of from the prior year driven by strength in Advisory. Trends from the third quarter persisted, particularly as results benefited from a broadening of transactions across sectors. Although underwriting revenues moderated overall, equity issuance was strong, and elevated levels of event-driven activity supported fixed income.

We continue to invest in our Investment Banking business. Our outlook entering 2022 is strong, and our pipelines continue to be healthy across products. CEO confidence remains high, and markets remain open and constructive. Additionally, Advisory transactions should support strong capital market issuance. Equity full year revenues were a record $11.4 billion, increasing 15% from the prior year as client engagement remained high. The increase versus the prior year was driven by strength in prime brokerage and, from a geographical perspective, Asia.

Revenues were $2.9 billion in the quarter. Increased revenues in prime brokerage on higher client balances were offset by declines in cash and derivatives on lower client activity versus the prior fourth quarter. This quarter also included a mark-to-market gain of $225 million on a certain strategic investment. Fixed income revenues were $7.5 billion for the full year, declining 15% from the last year's exceptional results. The full year decline was driven by tighter bid offer spreads in macro and credit corporates partially offset by securitized products.

Quarterly revenues of $1.2 billion were 31% lower than the prior year, reflecting a challenging trading environment and rates and lower volumes and tighter bid offer spreads and credit. Further, client engagement tempered in December, reflecting seasonal patterns impacting results.

Turning to Wealth Management. For the full year, Wealth Management produced record revenues of $24.2 billion and a PBT margin of 25.5%. Excluding $346 million of integration-related expenses, the PBT margin was 26.9%. Fourth quarter revenues were $6.3 billion, up 10% from the prior year, and the PBT margin was 22.6%. Excluding integration-related expenses of $109 million, the PBT margin for the quarter was 24.4%.

Quarterly margin was negatively impacted by seasonal expenses and certain compensation and benefits decisions made to further support our employees. Given the full annual impact of these decisions was taken in the fourth quarter, the impact was amplified in this quarter's margin. Going forward, this will be spread throughout the year pro rata. As we look ahead to the first quarter of 2022, we expect the PBT margin to be more in line with the 2021 full year margin, excluding integration-related expenses.

This business continues to benefit from strong client demand across the platform. Client assets grew nearly $1 trillion this year and now stands at $4.9 trillion. Fee-based flows were an incredible $179 billion in the year, recording growth in fee-based assets of $1.8 trillion or 25% higher than last year. In the quarter, asset management revenues were $3.7 billion. Net new assets of $438 million in the year represent 11% annual growth of beginning period assets. Momentum was carried through the fourth quarter, which saw net new assets of $127 billion. We saw strong asset generation from both existing clients and net new clients driven by the advisor-led channel. We remain a destination of choice for advisors and continue to add strong teams and retain productive advisors.

Net new assets growth is further buoyed by positive momentum in our newer channels, namely workplace. Our results demonstrate the tremendous asset generation capability of our platform. Transactional revenues in the fourth quarter were $1 billion, declining 23% from the prior year, excluding the impact of DCP, which declined by approximately $300 million versus prior year, revenues were flat.

The workplace continues to gain traction. Our total number of participants we now read stands at 5.6 million, 14% higher than last year, and unvested assets now exceed $500 billion. As James mentioned, we are reporting on a new metric to show the percentage of stock plan assets that vest and remain within Morgan Stanley Wealth Management. E*TRADE previously disclosed a similar metrics. The definition going forward will measure the retention of the value of vested stocks on a rolling 12- to 24-month period. This new metric will allow us to measure the potential strength of workplace to service the funnel to grow our asset base.

We saw 24% retention in 2021, which compares to 21% in 2020. As James mentioned, over time, we believe that number can reach retention for our stock plan administration business. Going forward, we plan to disclose this metric annually. Bank lending balances grew by $31 billion in the year, and now stand at $129 billion. Strong client demand for securities-based lending and mortgages drove the increase. Net interest income was $1.4 billion in the quarter driven by strong lending growth and the benefit of fully phased-in funding synergies. The fourth quarter NII is a reasonable base to inform 2022. This year, NII will be impacted by the forward curve on lending growth. On rates, while the timing and the magnitude of the rate hikes is uncertain, we should benefit from rising rates and the realization of the forward curve. This would imply an estimated $500 million of additional NII this year, largely weighted to the back half of the year. On lending, we continue to see strong lending demand. And while growth is likely to moderate some, we expect approximately $20 billion of loan growth in the year.

Finally, the integration of the E*TRADE continues to go well. We are encouraged by continued client engagement and are seeing rate clients take advantage of Morgan Stanley capabilities being introduced on the E*TRADE platform. Building on our digital client experience, clients are now able to link their self-directed accounts via single sign-on. We have successfully merged E*TRADE's bank legal entities with Morgan Stanley. Throughout the integration efforts, we continue to focus on a unified client experience while providing clients choice. Completing this integration successfully remains a key investment priority.

Moving to Investment Management. The timing of the Eaton Vance acquisition makes comparisons to prior periods difficult. So I will make my comments primarily on an absolute basis. Investment Management reported annual revenues of $6.2 billion and quarterly revenues of $1.8 billion. Our results continue to demonstrate the diversification of this business and a greater contribution from more durable management fee revenue. Total AUM rose to a record high of $1.6 trillion, of which long-term AUM was also a record at $1.1 trillion. Total net flows were $12 billion in the quarter driven by liquidity and overlay services. Long-term net flows were slightly negative. For the full year, net flows were $115 billion. Asset management and related fees were $1.6 billion in the quarter. The 8% sequential increase was driven by higher performance fees. As a reminder, performance fees are mostly recognized in the fourth quarter. Performance-based income and other revenues were $166 million, reflecting broad-based gains in our diversified alternative platform.

Finally, the integration with Eaton Vance remains on track. In the first half of this year, we will bring a number of Eaton Vance and Calvert funds onto our international distribution platform. We are also now offering MSIM model portfolios on the E*TRADE platform, and we are seeing positive traction.

Turning to the balance sheet. Total spot assets were $1.2 trillion. Risk-weighted assets were essentially flat to the prior quarter at $472 billion. We adopted SA-CCR on December 1, resulting in a $23 billion RWA increase. This was offset by a decline in activity and lower market levels towards the end of the quarter. Our SA-CCR mitigation efforts were better than we anticipated and resulted in an impact lower than our initial guidance to produce a better outcome.

We repurchased approximately $2.8 billion of common stock during the quarter. We remain well capitalized post the adoption of SA-CCR, and our standardized CET1 ratio now stands at 16%, flat to the prior quarter.

Our tax rate was 23.1% for the full year. And absent any changes to tax law, we expect our 2022 tax rate to be in line with 2021. We which will exhibit some quarter-to-quarter volatility.

In terms of our outlook for calendar year 2022, the exit rate of our Wealth and Investment Management asset base and the integrations of our acquisitions set these businesses up to further support results. As it relates to institutional securities, while it remains difficult to forecast this business, the banking pipeline looks healthy and the year has started off well. That said, a lot will depend on monetary and fiscal policy and its impact on sentiment.

With that, we will now open the line up for questions.

[Operator]

[Operator Instructions]. The first question is from Christian Bolu with Autonomous.

[Christian Bolu, Autonomous Research]

So James, on the -- organic growth has been remarkably strong and you keep calling for a slowdown on organic growth, but we're not seeing any -- sort of any evidence of slowing anything, you’re accelerating here. I guess a couple of questions on that. Can you give us a bit more flavor around what's driving organic growth? How much of it is retention versus recruiting? On recruiting, who are you gaining share from? And then I would imagine you have quite a bit of visibility into the recruiting pipeline. So any sense of like how long do you think the sort of strength can continue?

[James Gorman, Chairman & Chief Executive Officer]

Good morning, Christian. I think you're talking about net new money, I assume, right?

[Christian Bolu, Autonomous Research]

Correct. Correct.

[James Gorman, Chairman & Chief Executive Officer]

Yes. Yes. I mean it's not a simple answer because in the old days, it was simple. It was a function of money that you lost by financial advisors leaving and money you gain by recruiting financial advisors. And obviously, that's a sort of sorry way to run a business. It basically settles your P&L for the next 9 years to buy a little bit of joy in the near term. Fortunately, we've outgrown that.

The source of net new money comes from several places. Number one, as you heard the retention in the in the workplace space is much better than what we did pre E*TRADE. I mean, we -- I think it went from 21% to 24% last year, but pre-E*TRADE, it was much, much lower and pre-Solium.

Number two, the reality is wealthy people get wealthier quicker than people who are less wealthy get wealthy. And we've got a lot of them. We -- now with our -- the sophistication of our network, the linkages we have to invest in banking across our top financial advisors, the family office structure the team has put in place are all drivers of growth that we didn't have before. I mean just the new assets that are brought in from our Investment Banking relationships sort of across the house, whereas in the past, we never really introduced across the house. It's truly running like one Firm.

Thirdly, we're just not losing many people. I mean that's the reality relative to previous years, where being significant net gainers. And that's not because we're doing stupid recruiting deals. That's because we're not losing a lot of people. Now we are doing recruiting deals. There are talented people in the market. They're not coming from one1 particular Firm or another. We don't focus on firms, we focus on individuals, and that has been doing well. Then you add in things like the technology the team has put in place in Wealth Management, sort of the virtual advisor type technology where you leverage the best talent we have across the whole country, all of the old platform that is being built out, where we now provide the product that you would have had to go to another Firm to get. And finally, you bring in the deposits and what we've done with the bank and the online banking. And then you throw on top of that E*TRADE and what that's been doing in growth.

And so Christian, it's an interesting story. It's many, many parts, which is why we're confident it's going to keep going. Just recruiting, that's different. You turn that spigot on or off, but it's not just recruiting. So I think there's going to be strong organic growth. I mean these numbers, we said unprecedented for reason. It had never -- we've never seen -- it's 10%, 11% organic growth year-over-year. That's got to be the best in the industry, and overwhelmingly, the best in our history. And it's better than, frankly, many of the traditional faster-growing, so-called faster-growing companies. So we're really excited about it. I don't think 10% or 11% is realistic to hold. But certainly, we're not going back to anywhere near where we were in the old days.

[Sharon Yeshaya, Chief Financial Officer]

If I can also add to it, Christian, I would just say if you actually look at the data, is relatively, as James said, balanced across many of these different sectors. But as you think of just the advisor channel, you're seeing not only -- we've, I think, spent a lot of time speaking to the community around assets held away. We are seeing existing clients bringing assets as well as new clients bringing assets to the advisor-led channel. So you are seeing a balance of both.

[Christian Bolu, Autonomous Research]

Okay. For my second question, on expenses, really nice control in the quarter, but all your peers are speaking about elevated expense growth going forward to retain talent and just to invest for growth. Can you talk about just longer term, how you're thinking about balancing sort of that good expense control that we like while continuing to invest for the long term?

[Sharon Yeshaya, Chief Financial Officer]

Yes. I think we have managed expenses well. I think that we always are cognizant of the pressures around expenses, both on the wage side and on the non-comp side. If you think about the comp side, I think we constantly feel that we've paid for performance, and that's sort of been the model that we have. But as you also think about the non-comps, we're investing in our integration. We're investing in technology, resiliency, cyber. And I think we're also putting in place different types of investments as you think about positioning Morgan Stanley up for growth and making sure that we have the right people and the processes in place to do that. But there is also inherent operating margin in -- or excuse me, operating leverage in the model, and that's been something that we've been able to demonstrate, I think, this quarter as well as over the course of the year.

[James Gorman, Chairman & Chief Executive Officer]

Yes. I'd say, Christian, obviously, this is going to be a hot topic because it's all anybody wants to talk about all of a sudden is expense management for 2022. I'm not going to talk about competitors, but you've got to look at business models. I mean, we're a different business model. Just take our Wealth Management business, which is $24-plus billion in revenue. Those advisors are paid on a grid. There is no inflation on it. It's based upon what they produce. Most of our investment bank is similarly paid based on bonus and that's based on what they produce, what our performance is. If that goes up, they go up, which they did this year and we were thrilled to do that.

So we've invested a lot in technology, but we've also bought companies. As I said before, we didn't just buy E*TRADE and Solium and Eaton Vance, we bought technology businesses within them, which we would have been developing ourselves, the online banking business within E*TRADE, the Solium workplace platform, which is basically -- it's basically software programming business, the Parametric platform with Eaton Vance, all of these are things which if we built would have been very expensive. So buy versus build, we made that trade-off. So it's a combination of all of those. We're very comfortable with our expense situation right now. And I don't know. We're just -- I guess, it's a different business model.

[Operator]

The next question is from Brennan Hawken with UBS.

[Brennan Hawken, UBS]

Sharon, I just wanted to ask a question on the slide that you've got in the deck on the realization of forward curve as well as the liquidity revenue and whatnot. So I'm guessing that the $200 million in liquidity revenue is waivers and the recovery of waivers. But that number seems a little low. Wasn't the waiver in the third quarter, $169 million? At least that's what was in the Q. And so can you maybe help reconcile where you're currently running on waivers versus that $200 million?

[Sharon Yeshaya, Chief Financial Officer]

Absolutely. So this $200 million, what we're reflecting here, Brennan, it's a good question, is the forward curve. And so the forward curve has the first rate hike in effect that we looked at from December 31. So that's in the second quarter. So therefore, it's the amount that you would expect to realize this year, should that forward curve play out. That's the way this slide was illustrated.

And just to drive the distinction, though, between what you see in the Q, the Q has all different types of waivers. It's not just money market waivers. But you're right to say that this number on a relative basis would be considered low if you're thinking about a full year context.

[Brennan Hawken, UBS]

Got it. Okay. So we could calibrate both the NII number and the liquidity for it. Okay. Excellent. And then when we think about -- you made a comment, I think, Sharon, when you were talking about the impact in the fourth quarter of Wealth Management margins, clearly low, right, full year impact of that benefit. But it sounded like what you said was, when we were thinking about entering 2022 that the full year is the way to think about it. But that's just like -- I just want to sort of clarify and understand. Did you mean that, that was the jumping off point? Or that that's the right way to think about 2022 in total? Because I'd assume with a lot of the rate benefit coming, continued operating leverage and whatnot, you'd be talking more about it jumping off point than thinking about the full year. But am I reading too much into that?

[Sharon Yeshaya, Chief Financial Officer]

No, you're not. Thank you for clarifying that. That's 100% accurate. What we were referring to is the first quarter of 2022 and using this full year number as a good launching off point is sort of setting you up. That's obviously ex-integration for the first quarter. So yes, as the rate rises, that should increase the margin as it goes forward throughout the course of the year.

[Brennan Hawken, UBS]

Okay. Okay. Hopefully, I can sneak one in because it was a clarification question.

[Sharon Yeshaya, Chief Financial Officer]

Sure. Don't worry, Brennan.

[Brennan Hawken, UBS]

The Investment Management fee rate was like really pleasantly surprisingly improved despite the fact that we're still waiving fees like we just talked about. Could you talk a little about -- I know Eaton Vance is early and there's still -- that is still progressing and whatnot. But I kind of thought that the third quarter fee rate would have settled fully but there was an improvement. Can you talk about what drove that improvement? Is that sustainable? Or was there some one-time lumpiness in there?

[Sharon Yeshaya, Chief Financial Officer]

It's the fourth quarter. Those -- you see some of the rates moving up in the fourth quarter, Brennan. But overall, I think as you look forward and you think about fees more broadly, we obviously have a larger asset base. I think it all ends back to this idea of growth. And that's -- I think, really ties to James' slide as well, which really thinks about what are we trying to build, leaning into growth and really thinking about creating durable fee revenue streams over time.

[Brennan Hawken, UBS]

So when you say the fourth quarter, I mean, I was excluding the performance fee because you guys break that out. Are there performance fees that are also embedded in the asset management line, too, that have the seasonality?

[Sharon Yeshaya, Chief Financial Officer]

No.

[Brennan Hawken, UBS]

No. Okay. So the core fee rate is a good fee rate to think about going forward?

[Sharon Yeshaya, Chief Financial Officer]

Yes. And we also disclosed them in the Q and in the K.

[Operator]

The next question is from Glenn Schorr with Evercore ISI Group.

[Glenn Schorr, Evercore ISI]

James, a little, tiny qualifier, if I could. Last quarter, I think you made the comment of, well, organic growth shouldn't be likely below 5%. Today, you said more like it won't be like the old days. Is it still like the old days, meaning that when you're in that 4% range pre all the additions and the opportunities you have in hand? Are we still looking at like should be 5 and above? I don't need to pin you down. I would just want to make sure I'm getting the right context.

[James Gorman, Chairman & Chief Executive Officer]

Yes. I don't know what -- I'm not sure I heard you correctly about what you said about what I said last quarter. But let me say what I'm going to say this quarter. Listen, we -- historically, back in the bad days, we actually had negative growth, right? We lost more money than we brought in. Then for a bunch of years through the early sort of '12 through '15, we were probably running at 1%, 2%. The couple of years before the E*TRADE acquisition and before, frankly, the business really hit its stride, we were sort of running around 3%, 4%, 5%, and we kind of guided 4% to 6% was reasonable for long-term predictions.

This past year, I think we grew at 11%, which is -- I mean, it's freakish, right, Glenn? This is -- you're talking about over $400 billion of new money. There are a lot of asset management companies that aren't $400 billion in size. I don't think that's sustainable. I mean, God I'd love it, but I don't think it's sustainable, but we're not going back to 3%, 4%. I don't know if it's 5, 6, 7, somewhere in that zone. But it's going to be a very healthy growth rate. And you compound that out over what is now $4.9 trillion, you get to really big numbers, which is why, combined with wealth and asset management, we put them together and currently, they're about $6.5 trillion. We can see a path to $10 trillion here, and we want to call that because we believe that's going to happen.

So that's -- we're in that sort of, I don't know, 4, 5, 6, 7. It's -- and that's why I deliberately said in the script that it was too early to put a net new money target out there. We needed to see where this really settled.

[Glenn Schorr, Evercore ISI]

Perfect. Exactly what I needed. Thanks. The other one, James, is the long-term goals, if you look at the last slide, I think those are great long-term goals. And if you could do that sustainably, I think you would get your multiple expansion, people would love it.

[James Gorman, Chairman & Chief Executive Officer]

Would be $200 stock, my friend.

[Glenn Schorr, Evercore ISI]

The high-class problem that you have is you kind of did some of them this year or last year, so maybe if -- again, if I could just have you part some more, then just go through, how to think about sustainability and what you're building towards what long-term means just so we don't do the up and down game every quarter. So like, "Oh, wait, you didn't hit your ROTC target this quarter…?

[James Gorman, Chairman & Chief Executive Officer]

Yes. Listen, this is the problem with putting goals out there. You hear them and everybody says, "Great, what's the new one?" Our goals last year, our 2-year goals was 14 to -- take ROTCE of 14% to 16%. We happen to hit 20% this year. It was an unbelievably good year. And if we were really operating with a permanent 20-plus percent ROTCE, the stock would be much higher than it is now. In fact, I think it should be higher than it is now, but that's a different issue.

So we put out 20%-plus. I don't think you're going to find another bank in the world that's putting out a 20%-plus ROTCE goal. And over the long term, we're not saying forever, that's why we separated client assets at 10 trillion as longer term not to be too cute about it, but we think that, obviously, just mathematically, if you do 5% net new money growth, you have 5% to 6% market appreciation, you're talking about a sort of just mathematically, full year to 5-year time zone to get to 10 trillion. By the way, in 2006, our total assets as a company were $1 trillion. We're now at 6.5. So it's not like an impossible lift.

On efficiency ratio, when I started in this job, I think our efficiency ratio was in the low 80s. We have grounded down every single year. And our range over the last -- including this year, 2021, '22 was 69 to 72. We obviously beat that. We had -- as I said, we had a blowout year. But we're consistently of the view that, notwithstanding all the talk about expense pressure, our efficiency ratio will stay under 70%. That for long-term management and managing growth and investing in the business, you got to balance growth versus expense, I think that's a phenomenal outcome.

And Wealth Management, our long-term goals there was 69 to 72 -- I'm sorry, 26 to 30, we've now said 30% plus. When we get the kick up from the forward curve, we get some of the rate increase in the next couple of years. We finished the integration expenses. You're going to see that number go up. No question about that. So that's the context. And frankly, I just like the round 20, 70, 30, 10, felt like a nice clean sheet. Everybody can follow it. And that's what we're planning on.

[Operator]

The next question is from Steven Chubak with Wolfe Research.

[Steven Chubak, Wolfe Research]

So I was hoping to unpack some of the assumptions underpinning the 30% margin target for the Wealth segment. Looking at the adjusted Wealth Management margin this past year of 27% and the 30% target is certainly a significant improvement from where you've been run rating over like the past decade-plus. In this new world order following the E*TRADE acquisition, it does feel a bit conservative when layering in the synergies as well as simply the realization of the forward curve.

And I wanted to see if we should expect the NII windfall to largely fall to the bottom line? And can you speak to what you believe is an achievable margin goal when contemplating a lot of the tailwinds or benefits you cited from higher run rate organic growth, the upside from higher rates and just the full realization of trade synergies?

[James Gorman, Chairman & Chief Executive Officer]

Steve, I have to say I love you. You're the first person in history to call a 30%-plus pretax margin Wealth Management as conservative. I mean we started we're like 3%. So listen, there's nobody in history, I think, has ever generated 30-plus percent number. I think it was back -- if you go back, it was Shearson in the fourth quarter of 1999, I believe, generated a 29% margin. And that was because they were doing, let's just say, a lot of Internet-based buy and selling, the clients back then. So that was like an artificial period.

Listen, there is the reason we put the plus on it. We don't think 30% is the ceiling. But let's run before we sprint here. We've gone from 5 to 10 to 15 to 20 to 25. 27%, 28% margins with growth, that's a phenomenal story. If we can do 30%, which we will do because of the way rates are going, it gets even better. So 30%-plus, there's no great magic to it. It's just the math of how we think the business plays out the next couple of years. I don't know what the plus is going to be. It might be 0.1 or it might be 5.

[Steven Chubak, Wolfe Research]

Fair enough, James. Although last year, I think you had a similar response, and I pressed you on the ROTCE target and it was raised. So hopefully, we'll see a similar outcome this time around.

[James Gorman, Chairman & Chief Executive Officer]

Maybe you're clairvoyant, I don't know.

[Steven Chubak, Wolfe Research]

Well, just for my follow-up, I wanted to ask about the upcoming changes to the capital regime. There's certainly some significant changes coming down the pike as part of Basel IV. I know we might be jumping the gun. We don't have a proposal yet from the Fed. But I was hoping you could just share some preliminary thoughts on how you see this potentially impacting minimum capital requirements at the Firm. And any learnings just from the SA-CCR experience in terms of your ability to mitigate some of those RWA inflationary pressures?

[Sharon Yeshaya, Chief Financial Officer]

Sure. Why don't I take the last one first, which I think the overarching theme is really around adaptation. As it specifically relates to SA-CCR, I think there was data mitigation that we were able to achieve. And I think we're proud of being able to focus and move forward. As it relates to Basel, no surprise that you asked the question, Steve. So it's nice to hear from you on that one. But obviously, there is no final rule yet. I think there's -- the difficulty in saying something is that there's often and can be offset between these rules. And so that's something that I would bear in mind as you think through it and as we all think through it. But what I think is really the point is that we have adopted really well. And we also have 280 basis points, I think, as James showed, of excess capital on the CET1 metric. And so I think we're really comfortable with our position, and we're comfortable to better understand the capital rules as they come our way.

[Operator]

The next question is from Mike Mayo with Wells Fargo.

[Michael Mayo, Wells Fargo]

Since, James, you're looking for the 20% ROTCE permanently, how much longer do you plan to stay as CEO? And by setting such a high target, are you encouraging some extra risk-taking?

[James Gorman, Chairman & Chief Executive Officer]

I'll take the second question -- second part of the question first. No. We, in fact, did a 20% ROTCE this year without taking extra risk taking with the movement in rates, the scaling the business, the completed integration to come of Eaton Vance and E*TRADE and the removal of those costs. The moats around the business and the embedded growth we have in net new assets, I don't think these are -- involve risk-taking at all. This is not about growing the balance sheet and growing risk-weighted assets. This is about growing durable fee sources, durable revenues and managing our expenses. I don't know if we're going to achieve it every single year, but we certainly -- it's certainly a goal, and it's a go for reason. So no, I don't think it involves taking extra risk. I mean, fundamentally, our business model is different, Mike, as you know, we generate $30 billion and it's going up from wealth and asset management that don't involve taking a lot of risk. Our investment bank -- traditional Investment Banking doesn't involve taking a lot of risk. Some of the underwriting, obviously, does. Some of the trading does. But a lot of the -- look at equities, a lot of the equities business is buying and selling on behalf of clients. So no, that's not -- the plan is not after all these years to dial up the risk.

And I'm not going to repeat what I've said many times, I'm not leaving now, and I'm not going to be here in 5 years, and it's up to the Board. We're developing successors. I'll be here a few years. And I want to see these integrations done. I want to see us firmly on this path. And I want to hand it over to somebody else who can take us to the next decade.

[Michael Mayo, Wells Fargo]

Great. And then one follow-up. As far as the ins and outs, that's helpful to give the market share. And the numbers speak for themselves, 15% Investment Banking market share, 23% Equity share. But on the one hand, I think you're one of the biggest providers to the tech industry. And with tech having some pain recently, I wonder what percent of your Investment Banking business is to the tech sector. And then offsetting that, perhaps there are some other industries that are coming back online after the pandemic.

[Sharon Yeshaya, Chief Financial Officer]

Sure. I would actually point to the fact that what I said, I think, in the last 2 quarters, is that we're seeing a broadening out of the advisor activity. It's not specific to any one sector. And I think that's been what's really contributed to the healthy pipelines in that business. across all the Investment Banking. And then as you look in sales and trading, it's a highly diversified model and has not really pinned down to any one specific sector.

[Operator]

The next question is from Matt O'Connor with Deutsche Bank.

[Matthew O'Connor, Deutsche Bank]

Can you just talk a bit big picture on the industry wallet for both banking and trading as rates rise and as the Fed unwinds the balance sheet? Obviously, there's been some benefits the last couple of years, and we're all trying to figure out do we anchor to the more recent last couple of years, go back to pre-COVID, if you think about the wallet. And my follow-up will be on your positioning specifically.

[Sharon Yeshaya, Chief Financial Officer]

Sure. I think the -- if you think about the industry wallet, -- There have been a couple of things that I would mention. One is, obviously, as I said, if you look specifically at Investment Banking, you've seen different types of activity. You see different types of corporates and sponsors, which has been one of the contributors of a greater wallet. But then if you also think about the Sales & Trading franchise and the movement there, the activity has changed. I think that you were looking back -- if you think back to pre-2018, '17, '19, there was obviously less activity with central banks all having a very similar approach and one rate. Obviously, as you inject rates rising, you do -- you would expect or one should expect different types of volatility and different diversification amongst products, which could contribute to a bigger or a different type of wallet that you saw in the early 2020 to period.

That being said, I mean, obviously, none of us have a crystal ball. I think right now, what we do know is that activity is high. I think there's a lot of client differentiation and a robustness really in that type of wallet more broadly. But we'll have to see how it goes. And I think the point I was trying to make in my conclusion is we don't know how any of it will impact sentiment. And I think that's the big piece that is out there is a factor that we have to watch.

[Matthew O'Connor, Deutsche Bank]

Fair enough. And then in terms of your positioning, obviously, Slide 6 of your deck shows very strong market share gains in the last few years. As you think about the market kind of ebbing and flowing, is the goal to hold the share, and this kind of ties back into some of the expense pressures in the industry where some of your peers are either invested quite a bit this last year or plan to in the future years? How do we think about the segments and you already have such strong share in equities, for example, but fixed income is an area where you've talked about being somewhere in between on the. So how do you think about those businesses from a competitive point of view going forward?

[Sharon Yeshaya, Chief Financial Officer]

So I think that when you -- what we would point to is I think this is a really -- it's a scale-driven model. We've put a lot of moats in place. I think having a global reach across different pieces contributes to the ability to actually hold or gain share across the Investment Banking division and -- or excuse me, the Institutional Securities franchise more broadly. If you think about the equities, we have a very strong very strong franchise there. Investment banking, as I've said before, we continue to invest in that business.

And then if you look at fixed income, I think we continue to feel good about that business, our client positioning, and we've gained share over the last couple of years, and we feel good about being rightsized and there for our clients as it relates to those needs.

[Operator]

The next question is from Ebrahim Poonawala with Bank of America.

[Ebrahim Poonawala, Bank of America]

I guess, Sharon, I was wondering if, one, you could just get a mark-to-market in terms of an update on all the integration, where we are and when do we expect to fully get that behind us. And just tied to that, I think, James, you've in the past talked about looking at E*TRADE scaling that up globally. Just give us a sense of is there something that can happen in the near term. And what's the optionality there on E*TRADE and taking it global?

[Sharon Yeshaya, Chief Financial Officer]

So why don't I start on the integration. I think where we -- what we had said was we looked for approximately a 3-year integration period. We have seen some -- and this is specific to E*TRADE, we have seen obviously a portion of the integration-related spend over the course of the last 2 years. We would expect the vast majority of the integration-related expenses to be pulled forward into 2022 with a slight residual in 2023 but most of that happening in 2022. And I think that what you'll see later in the 2023 space will be more on the back end and not really a client -- not really client-facing.

As it relates to the actual cost synergies that we've seen, we're in a very good place. I think that it's exceeded our expectations in terms of the guidance that we gave in terms of a time line and seeing those come through. But on a holistic basis, we stick to the cost synergy guidance that we gave when we first announced the transaction.

[James Gorman, Chairman & Chief Executive Officer]

On the international, I mean, E*TRADE already manages some plans internationally. We don't have immediate plans to take the platform outside the U.S., but it's certainly part of the long-term strategy. So I'd say right now, let's get the integration done. Let's prove out the case here, get the cost synergies we talked about sort of close the books on that, and then we're looking for further expansion.

[Ebrahim Poonawala, Bank of America]

Got it. And just a separate question around -- there's some concern that the Fed is behind the curve in terms of monetary policy, how concerned are you in terms of the risk of an accident happening with one of your clients within the capital markets business if the Fed has to hike faster or get to QT sooner than expected? Any thoughts around that?

[James Gorman, Chairman & Chief Executive Officer]

We've got a lot of clients. So I'm sure some of them are well positioned for rate hike. Some are -- it's very hard to predict that, that point suggests we're going to get 3 to 4 rate hikes this year and 3 to 4 next year. That feels kind of right. That gets us back to sort of near normal. Normal would be about 10 increases from here, gets us to about 2.5%. If people aren't positioned to manage getting back to normal, then it's kind of -- I mean, it's sort of their problem. It's not -- I'm not particularly worried about it, to be honest. And we don't try and project how people are going to change their positioning with what is a fairly predictable set of outcomes, which is we will have a normalization of interest rates at some point in the next couple of years.

[Operator]

The next question is from Jeremy Sigee with BNP Paribas.

[Jeremy Sigee, BNP Paribas]

I just wanted to ask a couple of follow-up questions. The 2 related questions really about the wealth management growth because, obviously, that's just such a strong theme in what you're doing. The first one is I think the new metric you're giving us, the retention invested assets. That's an interesting metric and a useful one. Could you talk about how you're driving that in terms of how you're going to get that higher in terms of how you're approaching those clients and what product you're putting in front of them to drive that higher?

And the second question, related, are you seeing any cross-sell or revenue synergy between your 3 Wealth Management channels, Advisory, workplace, self-directed? Or is it still too early for that?

[Sharon Yeshaya, Chief Financial Officer]

Sure. So on the first -- on the new metric, I think that the first driver you're going to see is a lot of the companion accounts, right? So we've talked about the fact that we would expect to give everybody on the U.S., a companion account or at least be at 90% by the end of this year, and that's still on track. And what that will allow for is as those assets from stock plans vest into a companion account, you retain them in a Morgan Stanley self-directed type of way.

And then you use -- this will lead to the second question that you asked and sort of tying it together, products like LeadIQ or technology investments like [Project Genome] to better understand our clients and offer us the technology and that agility to give advisors and to provide the right advisors to the right workplace participants. We are already doing that. We already have pilots in place where we are giving different workplace individual advisors. And so I would say that this -- the first step is really getting everybody a companion account and that's part of the integration process.

And then the second part is using technology to better match clients such that, while they still get client choice, we're able to offer them the full advice network that Morgan Stanley has to offer.

[Jeremy Sigee, BNP Paribas]

That's great. Could I just ask an unrelated follow-up? Do you need to get the CET1 ratio down to support your ROTCE target staying above 20%?

[Sharon Yeshaya, Chief Financial Officer]

Does it -- no, this is a longer-term target. I think you saw it even this year. So I would just retort with look at this particular year and where we were in terms of our CET1 and, obviously, say we were able to do it given the market circumstance. I'd say that over time, however, we continue to look at capital. As we think about how do we best use that capital for investment, returning it to shareholders with dividends, looking at buybacks and then other ways and uses of capital as we have over the course of the last decade.

[Operator]

The next question is from Dan Fannon with Jefferies.

[Daniel Fannon, Jefferies]

I was hoping you could discuss the profitability of the asset management business now that you've had several quarters of Eaton Vance. And I know that deal wasn't cost driven, but wondering if there's any additional synergies? And as you think about money market fee waivers coming through, as you mentioned earlier, the incremental margin on that in the context of the overall profitability of that business?

[Sharon Yeshaya, Chief Financial Officer]

Sure. So I think that the fee waiver sort of speak for themselves, and so I think that gives you a direct number. On the E*TRADE and Eaton Vance integration -- or excuse me, the Investment Management and the Eaton Vance integration, I think that the way to think about it is it wasn't ever a cost savings transaction. The idea was always to marry the platforms, and you've already begun to see that. So if you think about the diversification of the product suite itself, you're in a position where if you see flows in one business go down, you've seen flows go up in other businesses. And so that's given you this ballast almost in that business specifically. But in addition to that, and I mentioned this in my prepared remarks, if you look at the second thing that we had highlighted a lot when we purchased Eaton Vance was the different distribution networks. So we have an international -- or Morgan Stanley had an international distribution capability that Eaton Vance didn't have.

So a product such as Calvert, where you have a cyclical tailwind in terms of -- and a secular tailwind in terms of people being interested in that sustainability space, that is going to be sold using our international distribution channels beginning in the first half of year. I think that shows the progress and momentum that we have in place as you're marrying those 2 different sort of companies and they're coming together as one.

[Daniel Fannon, Jefferies]

And one of the other attributes you've highlighted is the Parametric opportunity within Wealth. I guess, is it too early to talk about uptake of that, some of the tax advantage strategies they offer in terms of your Wealth clients?

[Sharon Yeshaya, Chief Financial Officer]

Well, Parametric was already offered and very well received within the Wealth Management platform. I think we're looking for more ways to sell -- to offer that product, I should say, within different parts of the Wealth Management channel.

[Operator]

There are no questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you, everyone, for participating. You may now disconnect.