Morgan Stanley (MS) Q4 2020 Earnings Call Transcript

Morgan Stanley (NYSE: MS) Q4 2020 earnings call dated Jan. 20, 2021

Corporate Participants:

James P. Gorman — Chairman and Chief Executive Officer

Jonathan Pruzan — Chief Financial Officer

Analysts:

Brennan Hawken — UBS — Analyst

Mike Mayo — Wells Fargo Securities — Analyst

Christian Bolu — Autonomous — Analyst

Steven Chubak — Wolfe Research — Analyst

Glenn Schorr — Evercore ISI — Analyst

Devin Ryan — JMP Securities — Analyst

Mike Carrier — Bank of America Merrill Lynch — Analyst

Jeremy Sigee — BNP Paribas — Analyst

Jim Mitchell — Seaport Global Securities — Analyst

Presentation:

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 supplement, 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 this strategic updates, the reported information has been adjusted and is noted in the presentation. These adjustments were made to provide a transparent and comparative view of our operating performance against such strategic objectives. The reconciliations of these non-GAAP adjusted operating performance metrics are included in the notes to the presentation.

On October 2, Morgan Stanley closed it’s acquisition of E-TRADE, which impacts period-over-period comparisons for the firm and Wealth 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 P. Gorman — Chairman and Chief Executive Officer

Thank you, operator. Good morning, everyone. Thank you for joining us. And I fully appreciate, we’re competing with historic day here, so particularly appreciate you listening in. We will be brisk as we always try to be.

Morgan Stanley delivered record results in 2020. We generated an ROTCE of 15.4%, while meaningfully driving our strategic vision forward. We successfully closed our acquisition E-TRADE, received an upgrade from Moody’s to A2, replaced some review for upgraded second time and announced our intent to acquire Eaton Vance.

Then, last month, following the Federal Reserve’s release of its second stress test results, we announced a $10 billion buyback program that we intend to execute in 2021. Our performance and competitive position serve us hard evidence that Morgan Stanley has reached an inflection point. Jon will discuss the details of this year’s performance in a moment, but first let me walk you through our vision for the next decade and outlook focused on growth, as outlined in our annual strategic update. This is something we’ve now done since I believe 2012.

Let’s turn to Slide three. Our strategy revolves around demonstrating stability in times of serious stress, and delivering strong results when markets are active. 2020 for sure tested this thesis. In a rapidly evolving operating environment, we responded to heightened volatility and supported open and functioning markets and client needs. We delivered record revenues of $48 billion, while remaining disciplined in our risk management, those revenues by the way are up from $34 billion in the time period 2010 through 2014.

Turn to Slide number four. We enhanced our positioning in areas of secular growth with several strategic acquisitions. In 2019, as you know, we advanced our workplace offering with the acquisition of Solium. And in 2020, we took a leap forward when we announced our acquisitions of E-TRADE and Eaton Vance. Combining with E-TRADE positions us to reach clients in various stages of wealth accumulation in a scalable, economic way. E-TRADE’s technology, products and innovation mindset enhance our growth model. Further, E-TRADE serves the younger demographic, while on average over 10-years younger than those we have historically served, and we can continue to service, as their needs become increasingly complex.

With Eaton Vance, we will create a leading asset manager of scale. Eaton Vance brings new investment capabilities to our platform and leading positions in secular growth areas, particularly customization and sustainability. The deal will also expand our client reach, combining MSIM’s robust international distribution with Eaton Vance’s strong US distribution.

Please turn to Slide number five. Having experienced superior periods of fragility, healing and stability, our firm is now at an inflection point. The next decade will be characterized by growth. Our growth drivers span across all three of our business segments. We’ll focus on gaining market share, expanding and deepening client relationships, realizing acquisition, synergies and operating leverage and finally, returning capital to our shareholders.

Please turn to Slide six. Scale in our interconnected businesses are the foundation for our first growth driver, gaining market share. Our integrated investment bank produced $26 billion in revenue on a pro forma basis. Our Wealth and Asset Management platforms, is among the largest globally with over $5 trillion in combined assets.

Our breadth and depth of product offerings and services, have enabled us to gain an increased share of client wallet, as you can see on Slide seven. Our segments are working together to deliver holistic client coverage and are capturing asset and revenue growth. In 2020, International Securities generated over $300 million of revenues from transactions through Wealth Management referrals. Wealth Management in turn, gained $20 billion of client assets and Investment Management saw $6 billion of net flows and commitments all from Institutional Securities referrals.

Our second growth driver, expanding and deepening our client base begins with Institutional Securities, on Slide eight. Our integrated investment bank benefits from our coordinated and client-focused approach. We built revenues meaningfully to a record $26 billion in 2020. The result of this growth, coupled with risk and expense discipline, was an operating margin of 35%.

Turn to Slide nine, which talks about our Wealth Management business. With the acquisition of E-TRADE, we are now a top three player in each of the key channels in which investors manage their finances, and each presents unique growth opportunities. With our increased capabilities, we can deepen client relationships and provide more services to millions of households.

If we look at E-TRADE on Slide 10, you will see the business had a remarkable year in 2020, setting new records across all material metrics. The unique backdrop dramatically accelerated digital adoption and meaningfully increased levels of engagement. Versus prior records, trading activity more than tripled and net new assets more than doubled. Deposits reached record levels. Extraordinary growth versus prior records is hard additional evidence that our decision to buy E-TRADE was indeed the right one.

On Slide 11, we illustrate our extraordinary accumulation of net new assets, bringing over $200 billion of assets this year, new to our firm, that’s 6% of beginning period assets on a pro forma basis. We’ve invested heavily over the years, building our modern wealth strategy, enhancing our technology and building new businesses and the addition of E-TRADE will only help. This year’s net new asset growth was remarkable. And while net new assets tend to fluctuate obviously in any year, this is — and this was likely at the high end of what is a likely range, we still expect net new assets remain well above historic levels.

On Slide 12. Every year for the past decade, our revenues have increased and with E-TRADE, our daily revenues will be significantly higher in the future. In 2020, 65% of trading days, saw revenues in excess of $70 million, that was compared to just 2% only four years ago.

Let’s talk about Investment Management on Slide 13. With our announcement to acquire Eaton Vance, we will create a premier global asset manager with $1.4 trillion in assets under management. Since 2017, Morgan Stanley Investment Management has grown assets under management by over $360 billion and both MSIM and Eaton Vance have each individually attracted industry-leading long-term net flows over 20%. We’re really excited about this transaction and the integration planning is going well. Eaton Vance’s businesses remained strong, with increasing assets under management through the end of December. We expect to close the transaction no later than early in the second quarter.

Slide 14, shows the power of our Wealth and Investment Management Platforms when taken together. On a pro forma basis, we will have over $5 trillion in client assets, creating further revenue opportunities. Our efforts to enhance and build out these businesses have led to strong growth. Pro forma client assets are more than double the amount we oversaw in 2014. Consistent with our predominantly advice-driven business model, revenue on these assets expressed in basis points on the right hand side of the page, is materially higher than our three larger competitors.

Now, let’s turn to Slide 15, which includes an update on the acquisition synergies we expect to realize. The cost synergies we’ve previously outlined are definitely on track. And on the funding side, with the additional liquidity in deposits we’ve added since the announcement, we expect $100 million more in synergies than originally projected. We also expect to capture significant incremental revenue opportunities through these deals and they are outlined in a little bit detail down the right hand side of this slide.

So, turning to 16. Expense discipline is a fundamental tenet of the way we manage Morgan Stanley and as an enhanced record pretax profits and you see our efficiency ratio has come down from 2014 at 79% to just on 70% this past year and obviously that has driven the pre tax profit expansion.

So, our fifth growth driver is highlighted on Page 17. Over the past several years, we have consistently improved our returns, despite holding material excess capital. We’re excited about the opportunity to return that excess to shareholders and announced a $10 billion buyback program for this year. We restarted our share repurchase program this month and plan to increase our dividend when restrictions are lifted by the Federal Reserve.

I’ll now conclude with our updated strategic objectives, which is shown on Slide 18. Well this year will be a transition year, as we absorb two major acquisitions, our focus remains on positioning Morgan Stanley to achieve our long-term strategic target. Our long-term aspiration and frankly, our belief is that, Wealth Management will generate a margin over 30%. By 2022 we expect — by 2022 and in that period, we expect to range from 26% to 30%, as we continue to work through the E-TRADE integration. We also plan to invest in many aspects of our business for growth, that will balances with discipline. In so doing, we are keeping our long-term efficiency ratio below 70%, and within the range 69% to 72% over the next two years.

Finally, our long-term aspiration for ROTCE is indeed to exceed 17%. How quickly that occurs, depends not only in our business performance, but also of course on capital distribution. In the meantime, we raised our two year target to the range of 14% to 16%. As always, these targets are subject to major moves in the economic outlook and any big changes in the political and regulatory environment. However, based on what we see now, we fully expect to achieve these as stated.

That concludes the strategic part of the conversation. I will now turn the call over to Jon, who is going to go through the fourth quarter and annual results and then together, we look forward to taking your questions. Thank you.

Jonathan Pruzan — Chief Financial Officer

Thank you and good morning. The firm produced revenues of $48 billion in 2020, records both with and without E-TRADE. Through our continued momentum into the fourth quarter, with revenues of $13.6 billion. Dynamic markets, incredible volatility and consistent client engagement across all three businesses, drove results.

Excluding E-TRADE integration-related expenses, our ROTCE was 18.7% and 15.4% for the fourth quarter and full-year respectively, and EPS was $1.92 and $6.58 respectively. We continue to deliver on operating leverage in 2020, led by Institutional Securities. Non-compensation expenses for the year increased 15%, driven by increase in volume-related expenses and higher credit provisions. These increases were partially offset by a decrease in marketing and business development. Compensation expenses increased 11% on a full-year basis on higher revenues. Revenues for the full-year were up 16%, resulting in efficiency ratio of 70% down from 73% in [Technical Issues]

Now, to the businesses. In Institutional Securities, our business achieved various records throughout the full-year. Our revenues were $26 billion, 25% higher than our previous best year. While all regions contributed to the results, growth in Asia was a standout. Revenues were $7 billion in the quarter, marking the strongest fourth quarter in more than 10-years. The traditional seasonal slowdown was not experienced and clients remained active, up until the week of Christmas.

Investment banking revenues were $7.2 billion for the full-year, 26% higher than 2019, driven by record underwriting revenues, particularly equity. In response to the COVID environment, the year saw a rolling opening of markets beginning with debt and rescue financing, next with equity and very recently, leveraged loans and corporate M&A financing. Quarterly results were the strongest in over a decade, generating revenues of $2.3 billion, 46% higher versus the prior year, driven by record underwriting and advisory results, with each region contributing revenues well above average run rates.

Overall, the investment banking pipeline continues to be healthy across products. The pace of M&A announcements has accelerated and client and boardroom dialog is active. Equity issuance remains robust with a strong backlog from IPOs, driven by leadership in healthcare and technology and follow-on activity, notably in the Americas and Asia. After a record-breaking year in investment grade and high yield debt markets, strategic activity should support increased acquisition-related financing.

In equity Sales & Trading, we remain number one globally for the 7th consecutive year. Full-year revenues of $9.8 billion, increased 22% from the prior period. This represents the strongest annual result in over a decade. This year’s market backdrop was unprecedented and the strong performance across products reflected heightened client activity, amidst elevated volatility and a double-digit increase in global market volume.

Fourth quarter revenues of $2.5 billion and full-year results were robust across products and regions, with the biggest growth drivers from derivatives and Asia. Fixed income sales and trading revenues were the highest in over a decade, increasing 59% to $8.8 billion for the year. Clients were highly engaged and year marked by higher volumes and volatility, active capital markets and wider bid-ask spreads. Fourth quarter revenues of $1.7 billion, increased 31% year-over-year.

Results in the quarter and full-year were led by credit and foreign exchange. For the full-year, Asia showed particular strength. Across other Sales & Trading and other revenues, results this quarter improved versus the prior year. The increase primarily reflected lower provisions for loan losses and movements related to deferred cash compensation plan.

Our ISG credit portfolio continues to perform well. Over 90% of our ISG loans and commitments are investment-grade or secured. ISG loans and lending commitments are up $9 billion this quarter, as we continue to support our clients, while our funded ratio in our corporate book has continued to decline and is now close to pre-pandemic level. After building our allowance for loan losses throughout the first three quarters, it was essentially flat in Q4. ISG provisions were $14 million, while net charge-offs were approximately $40 million, primarily related to one commercial real estate loan secured by a hotel.

While risk remains concentrated in our vulnerable sector portfolio, the portfolio continues to decline. We de-risked this portfolio by close to $2 billion this quarter and it now represents less than 10% of our portfolio. Over 90% of this portfolio, like our entire ISG portfolio, is either investment grade or secured. Our reserve coverage remains stable and forbearance for the ISG portfolio continues to decline.

Turning to Wealth Management. On October 2, we closed our acquisition of E-TRADE. This quarter’s results includes the combined business financials with virtually all of the E-TRADE revenues in transactional and NII. Making comparisons to prior periods are difficult, so, I will focus my comments on Q4 and how we are positioned for 2021. We have also included some new disclosure in the supplement on Page seven regarding the combined business.

In the quarter, revenues were $5.7 billion, excluding integration-related expenses of $231 million, the PBT margin was 22.9% and full-year margin was 24.2%. The underlying drivers of this business remain extremely strong, reflecting comprehensive capabilities and strong client engagement and activity.

We saw a record fee-based flows of $77 billion for the year and fee-based assets are now $1.5 trillion. We added $18 billion of loans or 22% growth in 2020 and loans are nearly $100 billion. Asset quality continues to be excellent and loans in forbearance are under $400 million, down from approximately $2 billion at the end of Q1.

Deposits continue to grow and were supplemented by $54 billion from E-TRADE and are at $306 billion. The network generated net new assets of $66 billion in the quarter and on a pro forma basis over $200 billion in the year. We remain a destination of choice for advisers and continue to add strong teams and retain our productive advisors. These underlying fundamentals and the realization of synergies, position us well for the future.

In the quarter, asset management fees were $3 billion, benefiting from higher asset levels and $24 billion of fee-based flows. Transaction volumes remained elevated and revenues were strong, even after excluding approximately $350 million of DCP, as clients were active across both advisor-led and self-directed channels.

Net interest income was $1.2 billion in the quarter and benefited from the incremental deposits in investment portfolio that came with E-TRADE. This is a reasonable exit rate to inform 2021, and includes the purchase accounting adjustments associated with premium, amortization which is approximately $50 million a quarter. This year, NII will grow due to the realization of our funding synergies and lending growth, with limited impact from rates.

On funding synergies, we on-boarded approximately $4 billion of deposits that were previously swept off E-TRADE’s balance sheet in the back half of Q4, and we expect to on-board approximately $20 billion in Q1. As we invest these deposits and shed higher costs wholesale funding, we would expect to realize 80% of our revised higher funding benefits in NII in 2021, with the full impact of these actions reflected in Q2. On lending, we continue to see strong lending demand and expect approximately 10% loan growth to benefit NII.

Lastly on rates, we do not anticipate any change to policy rates in the near-term. However, we will benefit from the eventual normalization of rates. The acquisition of E-TRADE increases our US banks sensitivity to rates and a 100 basis point increase in rates would now contribute an estimated $1.5 billion of additional NII, compared to the estimated $1 billion we disclosed in our Q, prior to completing the acquisition. We continue to expect $800 million of integration cost over three years, with approximately 40% to be realized this year.

Following the close of the transaction, we took actions to realize the $400 million of cost synergies we outlined. Our efforts have been aimed at limiting disruption to the customer experience during the integration and will be measured. 2021, we will be exiting the E-TRADE branches, consolidating our bank entities and integrating HR and finance systems and we would expect to realize approximately 25% of the cost synergies during the year.

Investment Management reported revenues of $1.1 billion in the forth quarter, representing the second highest quarterly level in over a decade. For the full-year, revenues were $3.7 billion, in line with the prior period, but reflecting a greater contribution for more durable management fee revenues and less from carried interest.

Totally AUM rose to a record high of $781 billion of which long-term AUM was also a record at $493 billion. Long-term net flows were $8.5 billion in the quarter. Our global equity strategies continue to deliver strong performance and attract positive flows. Total net flows were $25 billion.

The global nature of our platform remains an advantage, as inflows across regions led to record long-term net flows of $41 billion for the year and an annual long-term growth rate of 12%. We are excited about the transaction with Eaton Vance. Across businesses and strategies, Eaton Vance’s assets under management across — excuse me, increased by over $65 billion since October. The overall tone of the business is strong and their momentum continues.

Turning to the balance sheet. Total spot assets were $1.1 trillion and standardized RWA’s increased to $454 billion, reflecting high levels of client activity and the closing of E-TRADE. Our standardized CET1 ratio was flat to the prior quarter at 17.4%. Our tax rates were 23% and 22.5% for the quarter and full-year respectively. We expect our 2021 tax rate to be in and around 23%, which will exhibit some quarter-to-quarter volatility.

We are pleased with our strong performance this year. Our franchise is better positioned for growth than we have been in well over a decade. We enter 2021 with strong asset levels, healthy pipelines, engage institutional and retail clients and an extremely strong brand. We are confident in our ability to deliver on our objectives.

With that, we will now open the line to questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Brennan Hawken with UBS. Your line is now open.

Brennan Hawken — UBS — Analyst

Good morning, thanks for taking my questions. Just wanted to start on the net new asset disclosure that you guys provided here this quarter, for the first time. Thanks for that. It’s very, very helpful. It seems as though the net new asset growth, the organic growth profile in the wealth business accelerated here in 2020, what do you think is driving that? Is that a — capturing a greater wallet share of existing clients? Is that an expansion of the client base? And it seems as though the metric excludes fees and commissions — is — you have an estimate of what that would mean for a headwind to that growth rate, because I believe most of the other competitors disclose it, net of those fees, so just want to try and make it like-for-like. Thank you.

James P. Gorman — Chairman and Chief Executive Officer

Well, let me start and Jon will talk about some of the disclosures stuff and as you point out, Brennan, it’s the first time I think we’ve done it in many, many years and we just thought it was time to reflect the fact, the business has unbelievable growth. I mean, we hear about a lot of competitors and a lot of digital players with frankly, in absolute dollars, modest assets and we were able to bring in $200 billion in a year.

Now, part of that is, obviously it’s pro forma basis, part of that is, if you look at what E-TRADE is doing, they’re doing great. Part of it is — if you’re net attrition of financial advisors, you will be a net attrition of assets on those advisors books, for the first time in 20-plus years I’ve been doing this. We’re not a net attrition, which is interesting, given the IFA channels continue to grow, but they’re not growing from us. So, we’re keeping assets of our advisors, we are gaining assets from new advisors. Through the workplace initiatives, through Solium and E-TRADES, we are gaining assets from the conversion and keeping of those assets at a higher rate than we were. So it’s a whole variety of things that have been done within the Wealth Management business, to look for ways to continue to accelerate client asset growth at the front [Phonetic] and it’s not a single thing. I do think 6% — that’s a — as I’ve used the expression before, it’s the sporty number. But, it’s a long way from the 2%, over 3%, 4% we were operating at. And I think it will be elevated. I don’t think we’re going to go back to 2% and — but maybe 6%, that feels high, certainly best-in-class what the Street offers. But, maybe Jon has more on the disclosures.

Jonathan Pruzan — Chief Financial Officer

Yes. So, the two critical exposures, the net new assets, and the fee-based flows and you can see from the footnotes on the net new assets, which is a concept of the assets that we bring into the organization, net of the outflows, that does not exclude the fees, you configure and see the fees on the asset base line in the disclosure about $10 billion or $11 billion. The fee-based flows do exclude that, as it a function about how much fee-based assets that we have that are generating a return on those asset base. Hopefully, that clarifies the question.

And I think, for us, the net new assets given the different business models across the different business models it reflects, most people don’t have the level of asset-based fees and we thought it was appropriate to disclose with that.

Brennan Hawken — UBS — Analyst

Yes, it’s — no, that’s great. That’s very helpful clarification and agree the growth rate works robust. I mean, you regularly hear about how, you know, the traditional Wealth Management firms are just the providers of share and certainly a mid single-digit growth rate does not suggest you’re providing seeding share to anybody. So, agreed there. And then, for my follow up, sort of, a related question, one of the things that — a lot of people and myself included, think is one of the more exciting opportunities for growth in the Wealth business, is the stock plan business, where you really just have maintained strong position competitively.

And you flag a lot of that in the deck, which is really helpful. You talk about the retention opportunity of the 15%-plus, which is what E-TRADE has pointed to historically. Are you — what’s the plan to integrate the stock plan platforms? How long do you think that might take? And is it right, when we think about the opportunity set, you’ve got the $435 billion of unvested assets, my guess is that the opportunity set, about how much of that tends to best for years, is that about a quarter or 30% and it’s right to think about that as evergreen, right? By invest and then they’re replaced with new awards in subsequent year, sorry about the multi-part question, but I think it’s an important one. Thank you.

Jonathan Pruzan — Chief Financial Officer

That’s, okay. So, we have integrated the sales team. We’re going to market through our corporate clients with the consolidated sales effort. As you would expect, we’re going to be very mindful of the integration of these platforms. I would highlight that there were certainly different emphasis in terms of big companies, small companies, private companies and we will converge those platforms over time and upgrade them, both to sort of bring the best of both of those platforms together. You’re right, the existing opportunity is the $435 billion of invested assets, and roughly 5 million participants. Our expectation is, we will continue to grow the number of corporate relationships we have, and therefore the number of participants and we’ve seen good closure rates since announcing, both, the Solium transaction and the E-TRADE transaction. So, we feel very good about the momentum of the number of new corporate relationships we have in that channel.

And then lastly, on the $435 billion, give or take 25% or 30% of that less each year, I think that’s a pretax number. So, clearly there’s tax impacting that, but as you say, our expectation is, that number will continue to grow as we bring on more and more corporate relationships.

Brennan Hawken — UBS — Analyst

Thanks for the color.

Operator

Thank you. Our next question comes from Mike Mayo with Wells Fargo Securities. Your line is now open.

Mike Mayo — Wells Fargo Securities — Analyst

Hi. Well, you clearly gained share this quarter for the year in capital Markets & Trading. Aside from your gaining share, what is your outlook for the industry wallet? As you know it shrunk in trading for a decade and now it may or may not have turned more permanently. So, some bank’s say, we’re planning for 2019 levels for trading, some think it can maintain this pace and say it’s in between. Kind of, where do you fall out and why? What do you see as the structural changes?

James P. Gorman — Chairman and Chief Executive Officer

Mike, it’s very difficult to say. I mean, just look about what we’ve been through in the last 12 months and look at activity in the first quarter versus the second quarter and then where the year finished. So, clearly there is a lot of activity in the market, there is enormous fiscal stimulus, rates remain very low. I think the global economies are recovering and I think the vaccine, if we get in the US to 1 million doses a day for the next 150 days would be spectacular. So there are lot of the industries that are continuing to look at share issuance, new IPOs coming, recapitalizations of different kinds raising debt. So, there is a lot of market activity, I think in the reasonable near-term.

Whether it is at the level of 2020, I mean, you’d have to bid against that, just on pure odds, less than 50% I think, but who knows, I mean, the year has started off strong and we count them one day at a time and the year started off strong, the markets were active, the economies are recovering globally, new administration has come in, it looks like we had a peaceful transition hopefully today. So, you know, I’m quite optimistic about it. I can’t put a pin to say exactly where we’re going to end up, but we are clearly gaining share. Our fixed income franchise has well recovered from the 2015 restructuring and 2012 lows. Our equity has bounced and retain their number one spot again in what has been a growing equity fee pool and you know, clearly that the banking revenues above $2 billion for the quarter, there is a lot of M&A activity and lot of underwriting activity. So I’m pretty optimistic. I mean, I can’t put an exact number on it, but I certainly don’t feel like we’re going to make a major back step at all here.

Mike Mayo — Wells Fargo Securities — Analyst

On that last comment, in terms of backlogs, are they up quarter-over-quarter, near record, down?

Jonathan Pruzan — Chief Financial Officer

Yes. Generally, I think from my comments, Mike, we describe them as healthy across all products in all regions with IPOs, as a stand out. As I said, M&A activity dialog is very active, pipeline very healthy. So, James said, a very constructive start to the year with very healthy pipeline.

Mike Mayo — Wells Fargo Securities — Analyst

All right, thank you.

Operator

Thank you. Our next question comes from Christian Bolu with Autonomous. Your line is now open.

Christian Bolu — Autonomous — Analyst

Thank you and good morning, James and Jon. Maybe back on Wealth Management organic growth and again echo the earlier comments, really appreciate the new information. But, James, you seem to be really pulling down the 6% this year as not sustainable. So, I guess, can you just maybe help us understand what exactly was elevated in 2020, was just overall industry was elevated? Was there something more specific to Morgan Stanley, like higher recruiting? I’m just trying to understand why you think it was elevated. And then, maybe more importantly, just looking forward, give us a sense of what you think the business can do sustainably, sort of, range for organic growth that you would expect for the business? Thank you.

James P. Gorman — Chairman and Chief Executive Officer

Christian, you probably know me well enough by now to know I’m not going to project a trend line based upon one point of data. Listen, we’ve had a decade of been growing net new assets around 2%, 3% and then 3%, 4%. Clearly, E-TRADE has fast growing asset growth capability that adds enormously. I think net positive financial advisor, or actual numbers of financial advisors went up this quarter, I think for the first time in years. So I just trend to the conservative, until I see more data and do I think it’s going to pull back to 2%? Not at all. But, if we could lock in 6% for the next 10-years and we’d be — we’re bringing $200 billion a year, I read about a lot of these online players have got $20 billion in total and we bring in $20 billion every five weeks, so we’re effectively creating these companies every five weeks.

Now, if it’s going to be 4.5%, 5.5%, I don’t know, my instinct is 6% on $4 trillion is a lot of assets to bring in and I think it’s doable. I’m not saying it’s not doable. But I’m not predicting that and I wouldn’t want to guide you to that. On the other hand, I don’t think we’re going back to where — I think we’ve got a different, kind of, company.

The reason is, the title of this presentation is called Morgan Stanley in an inflection point the next decade of growth is, if there is one message, I would like people to take away from it is, we are in the growth phase of this company for the next decade. We’ve been in — as we said, from the crisis forward, sort of, fragility then healing, then stability and we are unambiguously in a growth phase. We have the capital to invest in our businesses; we’re gaining share across our businesses; we’ve got scale in the key businesses; we’ve invested in a lot of technology improvements to the businesses to increase their efficiency and I believe we’re in a growth phase in this company, and one of those indicators to growth will be, you know, very strong net new asset growth.

Christian Bolu — Autonomous — Analyst

Fair enough. Maybe switching over to capital, with the stock now trading well above book value. How are you thinking about prioritizing buybacks versus dividends? I think in the past, you’ve spoken to an aspirational target of paying out all of Wealth and Asset Management earnings as a dividend. So maybe just some updated thoughts around how you’re thinking about that prospect? And again buyback versus dividend conversation here?

James P. Gorman — Chairman and Chief Executive Officer

Well, the third leg to that conversation, very important leg is investing in the business. If we’re going to grow, let’s pretend we’re growing, I don’t know, net earnings of $10 billion and we are paying out dividends at the moment of about $2.5 billion. So, if we’re doing a buyback this year of $10 billion, we’re only eating into our buffer $2.5 billion a year, we’re not going to chip away at a much, where it’s 17.4% and I think the — our threshold is 13.2%, I’m looking at Jon?

Jonathan Pruzan — Chief Financial Officer

Yes.

James P. Gorman — Chairman and Chief Executive Officer

13.2%. Let’s assume we carry, what a 50 basis point, 100 basis point buffer on a SCB. So, let’s assume we want to run at 14.2%, we’re at 17.4%, we’ve clearly got some room to move. Obviously, we’ve got the Eaton Vance move coming in, which affects those numbers about 100 basis points. So, as I think about it, I’ve just got this before half of that company has had sort of yield component to it, very stable revenues and earnings and we could clearly move the dividend higher and will, once the regulators permit that, we have — clearly, we have the capacity.

On the book value, yes, I would [Technical Issues] preferred to be buying stock last year, when we were at $27, unfortunately, we couldn’t do that. But I’m not troubled by buying a little over book value, and I don’t think we can be 2Q we have — what we have a 1.8 billion, 1.9 billion shares outstanding, obviously through the issuance from the deal. So, I’d like to get it back to a 1.5 billion type range over the next few years, and we’ve got this capital, we don’t there — on an up things, we can invest $10 billion, $15 billion a year in the business and generate the kinds of returns we expect to generate. So, it’s a mix of all three. But clearly, we like to see more action on the dividend. Clearly, we’re going to be aggressively buying back and consistently and clearly we have capacity to increase our investment in the core businesses.

Christian Bolu — Autonomous — Analyst

Great. High-class problem. Thank you.

Operator

Thank you. Our next question comes from Steven Chubak with Wolfe Research. Your line is now open.

James P. Gorman — Chairman and Chief Executive Officer

You there, Steven?

Operator

I think your line is muted.

Steven Chubak — Wolfe Research — Analyst

Sorry, do you hear me?

James P. Gorman — Chairman and Chief Executive Officer

Yes.

Steven Chubak — Wolfe Research — Analyst

My apologies for that. I just wanted to start off with a question on funding and NII. Appreciate the disclosure on funding optimization and the drivers of some of the improved synergies from the initial guidance. And I’m curious, how much room there is to cut deposit costs further. It looks like your Wealth Management deposit costs of 24 bps, is just running well above peers. And just a clarifying question regarding the NII guidance, Jon. Is the growth you’re contemplating in ’21, is that versus the 4Q ’20 base, which reflects the full impact of the deal, or was that a guide versus full-year 2020?

Jonathan Pruzan — Chief Financial Officer

I’ll do the first — the last question, first, which is that — it was based on the fourth quarter, so sort of using a fourth quarter annualized, is the right base to be thinking about. But again, we did have the full impact of both, the transaction for the fourth quarter, as well as the amortization of the premium from the investment portfolio.

You’re right, our deposit costs were 24 basis points, which were down 14 basis points for the quarter. We also saw an improvement, as you know BDP or what we call our Sweep Deposits, obviously at a lower rate, basically a 1 basis points relative to our wholesale, that cost about 100 basis points. So part of the funding synergies is really coming from replacing those wholesale funding, CDs and other wholesale funding, with the off-balance sheet deposits that we’re going to bring back on balance sheet. So we started the quarter, I think, about 65% of our funding and the deposits were Sweep. We’re now at 75%, we would expect about $15 billion to $20 billion of CD roll off, that’s obviously based on the maturities. So, we continue to think that we can drive our average deposit costs lower, as we continue to replace the wholesale with the incremental deposits from each.

Steven Chubak — Wolfe Research — Analyst

That’s great, and just for my follow-up. Big picture question, James, if you indulge me, I was hoping you could help us reconcile versus your prior target of 15% to 17% ROTCE, what rate market and capital assumptions are underpinning your 17% plus ambition? And, I guess, if we start to think about the inflection in growth that you cited and maybe even some tailwinds from normalization, just higher rates, which should be more than 100 basis point benefit; greater realization of revenue synergy opportunities; further progress on the SEB; the direction of travel there has been quite favorable. The 17%-plus longer term, still feels somewhat conservative. I’m wondering from your perspective, do you see, even in upper teens, or a 20%-plus ROTCE as a reasonable long-term ambition, just given the significant transformation that’s underway?

James P. Gorman — Chairman and Chief Executive Officer

You’re beginning to replace Mike Mayo. He usually asked me that. What about the plus? What’s wrong with plus? Plus means more.

Steven Chubak — Wolfe Research — Analyst

You can drive a truck through that range.

James P. Gorman — Chairman and Chief Executive Officer

Listen, I wouldn’t put — I wouldn’t try and model too much science into this. This is an expression of our aspiration and as I said, also happens to be our belief. It’s not just Disneyland, where we believe we will deliver these numbers and for some of the reasons you listed, ROTCE [Phonetic] being one of them, obviously has a huge impact on this firm. But look at where we finished last year and what our numbers were, these obviously become very possible. Whether it should be 17%-plus, 18%-puls, 19%-plus, if — we had said to you three years ago, our aspiration was to have a 17%-plus ROTCE, you would have thought we’re off the planet. So, I’m very comfortable with these numbers, if we could achieve this then obviously the stock should be trading much higher than it is today.

And embedded, you know, we do, do some math. We start with our budget; we start with our operating performance in 2018, ’19, ’20 to look at our budget projections. We do sensitivities around revenues. We understand what our comp and non-comp look like, over the next couple of years. Whether we have major litigation exposures or not, the integration costs that have got to work through and then the synergies of the various businesses, and then we of course look at the capital question, which I discussed earlier, I think with Christian on buyback dividend or reinvestment in the business and what our RWA growth is going to be in ISG, and how that affects the CET1 and you put all of that in a big washing machine and that spits a number with a plus on it.

Operator

Thank you. Our next question comes from Glenn Schorr with Evercore. Your line is now open.

Glenn Schorr — Evercore ISI — Analyst

Thanks very much. James, I wonder if we can look at Slide 14, and talk to something that comes up a bunch. You show your $5.4 trillion pro forma, if you look at that fee rate, there is only one other peer on that top 10 that has a fee rate equal or better than yours? And I think, it’s a good thing, but this comes up plenty, so I’d love to hear you talk about it? And the sustainability of that fee rate, I don’t see price pressure in the Wealth Management business. But people ask on it all the time. Just curious to get your thought process over the coming years and what’s kind of embedded in those, your medium and long-term targets implicitly with that? Thanks.

James P. Gorman — Chairman and Chief Executive Officer

I don’t think you’re going to see price compression of any significance across the Wealth or Asset Management platforms. It’s really a function, Glenn, of asset type. So, for example, the wealthier the clients, if you have clients with $100 million, they’re not paying 58 basis points, they’re probably paying, I don’t know, closer to 10 basis points or something, a client with a million dollars is paying closer to a 100 basis points. So, it depends a little bit on the business mix, as to what revenue you generate on those assets.

Obviously, some of the E-TRADE active trading clients have got high velocity on them, they’re going to have higher basis point numbers and a very passive position in restricted stock. So a little bit of that is — you’ve got to, sort of, peel away what’s going on under the numbers. But to your broader question, do I see price compression across Wealth Management? No, I don’t. In fact, we will probably generate more revenue as we build up the banking and the banking, lending and deposit product.

On the Asset Management side, I mean, listen, if you’re driving performance in the active side, you can generate — you can hold your fees as they are, it’s the underperformers lose their assets quick and they lose their fees. So I’m not terribly bothered about. And if you knew the names of the three above it, you’ve probably guessed them, there is a reason, they are more index oriented there — it’s a different business model. We generate a higher revenue per dollar of asset, but we pay a higher revenue comp structure per dollar of asset. So, it’s not exactly a 30 basis points, 40 basis points, 50 basis points win, as you know, obviously.

Glenn Schorr — Evercore ISI — Analyst

Understood, understood, we hear you well. Thanks. And then maybe if we could just bridge the gap, I think, I know the answer to this too, but this is a pretty strong environment, weekends holiday we trade the adjusted margin in Wealth Management of 24%, of the medium-term target of — two-year target of 26% to 30%, how do we get inside the range, without the help of rates, because the Fed theoretically is on hold for a few years?

James P. Gorman — Chairman and Chief Executive Officer

Well, the — yes, the business is growing. We had some additional expenses this year. For example, we made more contributions to our overall philanthropic and charitable efforts, given what’s going on with COVID, that cost is distributed across the businesses. We paid a one-time bonus to all employees earning less than I think $150,000, who don’t receive bonuses, given the headcount in Wealth Management, that disproportionately affects that business. So there is always a few things going on, that a point of margin is worth about $45 million a quarter, I think, if I’m doing my maths right, $18 billion, $180 million. So, it’s somebody like that. So, it’s not — small numbers can move it around 0.02. But I think, with increased growth, increased efficiency, better conversion of the assets, more asset flows in, generating this average 58 basis points is how you bounce between that sort of 20%, what did we say, 24% to 30% range, 26% to 30%. I’m sorry, 26% to 30% and depending on the environment, I mean, we’ve started the year strong, that probably helps the point, if that held up, there you go.

Operator

Thank you. Our next question comes from Devin Ryan with JMP Securities. Your line is now open.

Devin Ryan — JMP Securities — Analyst

Thanks, good morning. First question, just want to come back to some of the questions on organic growth and I like the Slide nine that shows the $8 trillion in assets held away, essentially making the point that you already have — the customer reach. And so, just trying to think about whether you view, kind of, all of that as potential wallet that you can go after or said another way, are there any products that maybe you don’t line up with, in that $8 trillion?

And then as the firm becomes more connected through technology, which I think you guys have done a great job over the past couple of years, how do you think about your strategies to connect with a greater percentage of that, you call it $8 trillion. I know every business has a little bit of a different, call it sales process, but are there new strategies or even financial incentives that you can think about to really accelerate the penetration into that?

Jonathan Pruzan — Chief Financial Officer

Sure, I’ll give that a crack and we’re not naive. We don’t expect to have a 100% of the wallet of all of our clients. So clearly, we don’t expect to bring in all $8 trillion over time, but there is significant overlap, as you know, in these channels and in these rough figures. We continue, as you saw through the net new assets, as James mentioned, a lot of that was from existing customers, consolidating their assets, a lot of that is being driven by the technology that we’ve made and the investments that we’ve made in the platform, that help our advisors advise their clients and we’ve seen people bring in more assets.

So, I think if you think about the opportunity set, I think we tried to line it up pretty well through the different channels. On the workplace, I think it’s really around retaining cash and retain invested assets, and then over time growing the relationships, self-directed at a minimum. We’ve seen people leaving the E-TRADE platform, as their needs got more sophisticated and they needed advice, we’re clearly going to capture that top part of the funnel with our FA’s, with the FA-led model that we have. So, again, a real opportunity and I like the way you described it, just look at the numbers, 2.5 million households, almost 5 million participants in 6.7 million households, the breadth and reach of the platform is quite large and there is some overlap there, but it’s still over 10 million clients that we can provide incremental services or bring in more assets from.

In terms of good activity, as you can imagine, we are collecting and analyzing data and working with our clients to try to figure out incremental needs and services and products that they need. With the E-TRADE acquisition, we bring on incremental digital capabilities and as you can imagine, this year, we’re spending the year trying to figure out and piloting ways that we can work better and more efficiently with our clients. We’re going to pilot around lead generation, we’ve defined the adviser group who is going to work with new clients; we’ve got scoring systems; we’ve got artificial intelligence trying to help predict what people are going to want and need and next best action. So, it’s really a culmination of all the investments that we made, plus the digital from wealth and we’re going to use this year to try to get a very good understanding of our client base, with these pilots and how we can provide incremental services going forward.

Devin Ryan — JMP Securities — Analyst

Okay, terrific. Thanks, Jon. Just a follow-up here, just on the core expense structure and trying to think about some of the benefits of 2020, with the pandemic that were deflationary, it would seem that some of those benefits roll off, there are some inflationary aspects into 2021, kind of, on a core basis. But, longer term, obviously, I think we’ve learned a lot about the businesses through the past 12 months and opportunities potentially to drive some longer-term savings or maybe core deflation in the expense structure. So, I’m just — love to get some thoughts around how you guys are thinking about areas or opportunities to maybe drive more expenses out of the system based on what you’ve learned over the last 12 months?

Jonathan Pruzan — Chief Financial Officer

Yes, I would say we’re still learning, crisis is not over, we clearly are hopeful around the rollout of the vaccine. I think, there are going to be some takeaways around some of the digital client experiences that we’ve been able to do, the work-from-home that we’ve been able to do, but I think it’s just — it’s a little early to start making those decisions. Let’s get through the crisis first.

Operator

Thank you. Our next question comes from Mike Carrier with Bank of America. Your line is now open.

Mike Carrier — Bank of America Merrill Lynch — Analyst

Good morning and thanks for taking the question. The strategic update and growth outlook, are always helpful. Just on the efficiency ratio, given the 70% level in ’20 and realized strong revenues in this environment, but with E-TRADE and Eaton Vance, operating at a better ratio, I think it’s a longer-term wealth management margin improving maybe 600 basis points, just what drives the conservative outlook? Are there areas that you want to invest significantly to continue to drive the growth? Or are there areas for potential improvement on SME?

James P. Gorman — Chairman and Chief Executive Officer

Listen, I think we said under 70, after two years. So, I don’t think that’s conservative. We were — Mike, we’re at 79%, just a few years ago. And when I started, we were much higher. So the long-term position is we’ll run this place with a 30% margin plus, what happens in the next two years, with the bouncing around the markets. So it’s — I don’t know, maybe we’re too conservative in the short run, but it’s — it doesn’t change our behavior, I guess, is what I would tell you. We are very determined to drive this company for growth and for efficiency and for return. That’s been unambiguous for a decade now.

So, it doesn’t change our behavior at all. It’s just what do we think as reasonable people, you should expect at a minimum to achieve in this time period, and that’s what we try and put in the two-year period. The longer term, we’re much more aggressive, but it was reality of two years. This year as I said, if you annualize the way this year started up, we’d better than — we’re doing better than the efficiency, rate.

Mike Carrier — Bank of America Merrill Lynch — Analyst

Yes, that makes sense. Jon, just one clarification on the wealth management, you gave a lot of numbers on the outlook just given the E-TRADE deal. I just wanted to clarify on the funding benefit, did you say 80% in ’21 and most of that by 2Q. And then same thing on the expense synergy, I heard a 25% and a 40%. So I just wanted to make sure I had the right number in terms of what you’re recognizing in ’21? Thanks.

Jonathan Pruzan — Chief Financial Officer

I think all those numbers that you gave are correct. The funding synergies are really from this transition from the off balance sheet, the on balance sheet and the run-off of the wholesale deposits. So again, that used more towards the back half in that, 80% that’s when you get into the second quarter, you’ll be using a quarter number, not a full-year benefit number, and then 25% on costs and approximately 40% on the integration costs. Also, yes, those are the right numbers.

Mike Carrier — Bank of America Merrill Lynch — Analyst

Got it, thanks a lot.

Operator

Thank you. Our next question comes from Jeremy Sigee with BNP Paribas. Your line is now open. If your line is muted, please unmute.

Jeremy Sigee — BNP Paribas — Analyst

Sorry, apologies for that. I thought the comments on net interest income outlook in wealth management were very helpful. And I just wondered if I could get you to talk in a similar way about the asset management fees in the transaction revenues in wealth management, because I — this is my estimate. So, I thought asset management was a bit below, maybe that’s a lag with the rising AUM. But obviously transaction revenues were very strong. So could you talk about those two revenue drivers within wealth management, please.

Jonathan Pruzan — Chief Financial Officer

Sure. On the asset management fee line, obviously the exit rate, as you know, we get the benefit now for the full-year of the $1.5 trillion in fee-based assets. You have averaging effect and exit effect in terms of 2021. So, now at the $1.5 trillion assets, will also have the benefit of the net new assets that we bring in over 2021 though on an average basis, but we would expect continued growth obviously in that line. We had over 10% growth year-over-year, in that asset management fees.

And then on transactional, it’s really going to around client engagement and client activity levels. Fourth quarter, we benefited from elevated transactional. I did say that, that was helped by the DCP number, which presumably may or may not repeat next year. But that the margin on that revenue, as we have talked about in the past, is virtually zero. And so, transactional generally has been declining. We now have the E-TRADE platform inside Morgan Stanley, so the commissions based on their options trading, as well as some of the flow dynamics will aid that number. So, it will be at a new level. But generally that’s going to be driven by volume-related activity. And we’ll have to see how it plays out recognizing the first 11 days of have been pretty good.

Jeremy Sigee — BNP Paribas — Analyst

Thank you. And just a follow-up on the acquisition expenses. You sort of break out the amount of acquisition-related expenses in here. I just wondered if you could talk to us about the split between, sort of, restructuring and amortization of intangibles, you said you’re going to be amortizing the intangibles. I just wondered about the amounts of that and where we see it?

Jonathan Pruzan — Chief Financial Officer

Sure. Why don’t I just give you a few. So again, we issued $11 billion of equity or about 230 million shares, generated $7.5 billion of goodwill and intangibles, you’ll see that in the first couple of pages of the supplement. Of that goodwill and intangibles, about $3 billion is going to be amortized at a rough rate of about 15-years. So about $200 million and that would be allocated in the non-comps in the wealth segment.

Operator

Thank you. Our next question comes from Jim Mitchell with Seaport Global Securities. Your line is now open.

Jim Mitchell — Seaport Global Securities — Analyst

Hey, good morning. Maybe we could talk a little bit about the momentum at E-TRADE. I just want to confirm the numbers, if I looked at their second quarter, sort of, retail client base is around $5.8 million, self-directed clients? And then I think in December, the fourth quarter was up to $6.7 million, are those apples to apples? And if so, that implies quite a bit of new account — net new account growth of close to 900,000, is that — that’s pretty good momentum and just maybe you could discuss what’s driving that and how you feel about that going forward?

Jonathan Pruzan — Chief Financial Officer

Yes. I mean I think we tried to lay that out. As I said on Page seven, you can see what pre closing — so, the September 30 number shows the self-directed assets within Morgan Stanley before the deal closed. So, yes, the growth has really been in the E-TRADE channel. Your number of about 900,000 is accurate. Again I think from our disclosure going forward, we had to conform sort of definitions and whatnot, but they have had real strong growth with new clients given the activity level this year. It’s a number you’ll be able to track whether the self-directed channel is growing through that number going forward. I don’t think we’re going to be explicitly disclosing net new clients within the self-directed channel as we try to integrate and bring these two businesses together.

Jim Mitchell — Seaport Global Securities — Analyst

Right, I imagine that’s better growth than anticipated. Does that give you even more confidence in the revenue synergies from E-TRADE?

James P. Gorman — Chairman and Chief Executive Officer

Yes. Yes and yes.

Jim Mitchell — Seaport Global Securities — Analyst

Okay, great, thanks.

Operator

[Operator Closing Remarks]