Morgan Stanley On Brokers: Ratings Span Entire Spectrum

While initiating coverage on brokers, Morgan Stanley said the industry is facing three disruptive threats. As the industry focuses on advice in search of growth, the firm has a sound piece of it for the companies in this space: scale and innovation.

Morgan Stanley initiated coverage of four companies in the space:

  • Charles Schwab Corp SCHW: Overweight with a $37 price target.
  • TD Ameritrade Holding Corp.AMTD: Equal Weight with a $29 price target.
  • E*TRADE Financial Corp ETFC: Equal Weight with a $34 price target.
  • LPL Financial Holdings Inc LPLA: Underweight with a $27 price target.
  • Triple Disruptive Threats

    Among the three disruptive threats Morgan Stanley's Michael Cyprys sees are competition for customer assets/activity and response to these, growing regulatory burden and technologies that can transform business models and creating new winners.

    Related Link: Trading The Online Brokers

    Advice As Growth Vehicle

    Morgan Stanley is of the view that advice is ultimately a vehicle to unify control over client wealth. A foray into the segment, according to the firm, would open to the brokers new revenue pools and important long-term and retirement investors.

    Edge Over Full-Service Brokers

    The firm feels that discount brokers can compete with full service brokers on value/price. The firm also sees them providing efficient delivery, given their digital savviness. Morgan Stanley estimates that the industry's $4.1 trillion in discretionary managed accounts would grow to $7 trillion by 2019. Accordingly, the firm believes that providing advice for a few will create an annuity-like revenue steam, which can help the companies command a higher multiple.

    Advice: Sound Indeed!

    Morgan Stanley believes shifting to advice opens a $22 trillion wealth pool for the brokers, driving revenues to $36 billion and mid-term earnings per share upside. The firm also believes that the consensus estimates underestimates the pressures on transactional revenues. According to Morgan Stanley, price transparency gives the online brokers a better value proposition.


    Morgan Stanley prefers brokers with multiple earnings levers and sees Charles Schwab as possessing diversified revenue streams and most EPS upside from the current rates. The firm indicated that it is above consensus for the company, given the faster net new assets and it moving cash onto its balance sheet, boosting economics four times.

    Citing a lack of clarity on regulatory and business model, the firm said it is underweight on LPL Financial, with relative downside. The firm noted that revenue/expense pressures drive its earnings per share estimate for the company lower.

    Meanwhile, on TD Ameritrade and E*TRADE, the firm remains Underweight, as it sees these companies offering less compelling valuation.

    Concluding, Morgan Stanley said its 2017 earnings per share estimate is 3 percent below the consensus estimate. The firm prefers Alts and brokers, which are growing client assets in an expanding market. The firm sees long-term opportunities for brokers and a 24 percent earnings per share boost if rates rise 100 basis points.

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