Morgan Stanley plans this month to buy out the remaining stake in the wealth management joint venture it formed with Citigroup in the depths of the financial crisis.
The firm said Friday that it had received regulatory approval to purchase the remaining 35 percent stake in the Morgan Stanley Smith Barney joint venture it did not own for a previously established price of $4.7 billion, which will be paid to Citigroup in cash.
The joint venture was born in 2009, forged from Citigroup’s Smith Barney unit and Morgan Stanley’s counterpart. Citigroup had long identified the brokerage business as a nonessential asset to be sold to free up capital during a difficult time for the bank. For Morgan Stanley, the deal offered controlling interest in the venture and an expanded presence in wealth management as it sought to diversify away from certain trading businesses and into less risky ones, like selling stocks and bonds to retail investors.
“It has been a long journey,†said James Gorman, Mrgan Stanley’s chairman and chief executive, who was visiting family in Australia when he received word of the approval. “It’s nice to see something go from vision to see something actually happen.â€
The firm had been waiting for months for the government to grant approval to buy the remaining stake, and the development is an important one for Morgan Stanley, which has made a big bet on wealth management. It expects the deal to close at the end of the month, according to a release on Friday.
Morgan Stanley said it would log a negative adjustment to its capital of about $200 million, reflecting the difference between the purchase price and the brokerage’s carrying value, which will hurt the company’s second-quarter earnings, scheduled to be released in July.
Glenn Schorr, an analyst who covers Morgan Stanley for Nomura, said that while the announcement had been expected, it was symbolic for Morgan Stanley and meant the firm will no longer have to hand over part of the ea! rnings of the business to Citigroup. Mr. Gorman said there were smaller benefits, too. For instance, Morgan Stanley will now control things like trading flow, which were previously shared with Citigroup.
Wealth management can be an attractive business. It requires relatively little capital to operate and brokers tend to generate a steady stream of commissions. It accounts for 42 percent of Morgan Stanley’s revenue, up from just 25 percent in the first quarter of 2008, when earnings were powered by trading operations. The unit, which is led by Gregory Fleming of Morgan Stanley, has been preforming above expectations.
The business has about 17,000 wealth advisers and $1.8 trillion in assets under management. In the most recent quarter, the unit reported revenue of $3.47 billion, up from $3.29 billion in the period a year earlier.
Still, the strategy is not without some risk. Wall Street’s most productive brokers are constantly being poached by rival firms or setting up shop on their ow.. And when these employees leave, they often take their clients. In addition, rising interest rates are likely to dent mortgage origination, an area Morgan Stanley is pushing into. At the same time, though, rising rates will allow Morgan Stanley to generate more income on customer deposits.
