Morgan Stanley (NYSE: MS) Q4 2019 Earnings Call Transcript

Morgan Stanley (NYSE: MS) Q4 2019 Earnings Conference Call
January 16, 2020

Corporate Participants:

Sharon Yeshaya — Head of Investor Relations

James P. Gorman — Chairman and Chief Executive Officer

Jonathan Pruzan — Chief Financial Officer

Analysts:

Glenn Schorr — Evercore ISI — Analyst

Christian Bolu — Autonomous — Analyst

Brennan Hawken — UBS — Analyst

Steven Chubak — Wolfe Research — Analyst

Mike Mayo — Wells Fargo — Analyst

Matt O’Connor — Deutsche Bank — Analyst

Michael Carrier — Bank of America Merrill Lynch — Analyst

Stephen Dunn — RBC Capital Markets — Analyst

Presentation:

Sharon Yeshaya — Head of Investor Relations

Good morning. This is Sharon Yeshaya, Head of Investor Relations. During today’s presentation, we will refer to our earnings release, financial supplement and strategic update, 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.

This presentation may not be duplicated or reproduced without our consent. Within the strategic update, our reported results for 2014 has been adjusted to exclude several significant intermittent items, which were highlighted in our 2014 Annual Report on Form 10-K. Likewise, our reported EPS and ROTCE metrics for 2019 have been adjusted to exclude the impact of intermittent net discrete tax benefits.

These adjustments were made to provide a transparent and comparative view of 2014 and 2019 operating performance against our strategic objectives. The reconciliation of these non-GAAP adjusted operating performance metrics are included in the notes of the presentation. 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, Sharon. Good morning, everyone. Thank you for joining us. 2019 was a strong year, representing one of the bests in our history. Results were within our target ranges with contributions from each of our business lines.

Jon will discuss the details of 2019 in a moment, but first let me take you through our annual strategic update presentation. Please turn to Slide 3. I think about our firm’s transformation in five-year increments. Over the first five-year period, we worked aggressively to clean up the issues from the financial crisis, stablize the firm, integrated Smith Barney into our franchise and rest our strategy. Over the next five years, we made significant investments in our business around digitilization, technology, talent and the balance sheet.

We grew revenues by 20%, while we managed expenses tightly, doubled net income and materially increased capital return. Our ROTCE now stands at nearly 13% and EPS is more than doubled, excluding intermittent discrete tax benefits. Today, we will discuss the next phase of our evolution. The goal continues to be to shift our business further, emphasizing more durable sources of revenue within Institutional Securities and from Wealth and Investment Management.

The continuation of this evolution should by design help support a base level of profitability during periods of market disruption. Drilling a little deeper into this, throughout this decade-long journey, we defended and expanded our Institutional Securities footprint, which we show on Slide 4. Our brand is closely tied to our institutional presence in leading integrated investment bank. Our premier institutional franchise remains a key competitive advantage, which has allowed us to take share and grow revenues despite a shrinking wallet. At the same time, the contribution from Wealth and Investment Management continues to grow as shown on Slide 5.

Over the last five years, we’ve increased the profitability of our Wealth Management business, while still making investments in the US banks and our Modern Wealth Platform. Of particular note, on nearly 100% of business days, we have revenues greater than or equal to $60 million, nearly three times that — which was five years ago. We also invested in our Investment Management platform. We put together a new growth-oriented leadership team and focused on clients, solutions and new products. We highlight the growth in long-term net flows, which reflect strong long-term performance.

With combined revenues of approximately $21 billion, our Wealth and Investment Management businesses are among the largest platforms in the world, and now we have an untapped opportunity to further scale our Wealth Management channel through our workplace offering. Meeting these ambitions for future growth would not be possible without a strong culture and a cohesive team.

On Slide 6, we describe our culture and the tenure of our leadership team. We have an eight-year track record of stating and meeting various public goals. We continue to invest meaningfully in our culture and diversity efforts to ensure we remain an employer of choice to add top talent. And further, Morgan Stanley has been at the forefront of sustainable finance. We founded our global sustainable finance group over a decade ago with the mission to accelerate the adoption of sustainable investing across capital markets.

I want to spend most of my time providing a bit more detail about the future opportunities we’re excited about and that we see across our franchise. Across our segments, we have platforms with scale benefits and we are positioned for growth.

Let’s start with Institutional Securities on Slide 7. Our Institutional footprint and franchise is extremely strong. In the face of a declining wallet, we have gained share over the last five years across our Institutional businesses. And we have reason to believe these gains are sustainable. Our business has benefited from the stability of the leadership and commitment to a global client footprint. We expect to continue to hold and gain share across the division.

On Slide 8, we take a deeper look at Wealth Management. 2020 marks a new chapter in our Wealth Management strategy. The significant investments we’re making in the digital space, the acquisition of Solium position us to efficiently service the mass affluent population and capture new clients and assets through the workplace. Moreover, we can leverage the corporate relationships we have built through our Institutional offering as we look to add new corporate clients.

We’ve completed the Morgan Stanley at Work offering to span beyond just Shareworks by Morgan Stanley, our stock plan administration platform. We’re enhancing and investing in our financial wellness and retirement offerings. This more fulsome suite of product allows us to deliver services to an even larger base of employees, and this will help ensure that our touch points are not limited to stock plan participants. As illustrated on this slide, we’re continuing to win new mandates. The combination of the state-of-the-art Shareworks platform and the Morgan Stanley wealth management capabilities is being very well received in the marketplace. We expect to fully convert all of our existing corporate clients to the Morgan Stanley at Work model by the end of 2021. To date, nearly 40% of those plans on the legacy Morgan Stanley system have been transitioned to Shareworks and the remainder will be accomplished by year-end 2020. And by the end of ’21, individual employees of our corporate clients will gain access to financial coaching, exclusive educational content and our self-directed brokerage offering, providing them with an introduction to our wealth management services.

Over the next five years to seven years, we expect to convert over 1 million employee participants to either Wealth Management digital or advisory channels, adding to the more than 3 million client relationships we have today. We’ll be able to provide a compelling offering for all our relationships, service in the ultra-high and high-net-worth segment with financial advisors and more mass affluent clients with our Virtual Advisor or digital solutions.

Moving to Slide 9, we’ve been clear that we believe that supporting advisors with cutting-edge technology and enabling them to deliver unique product and set of services to clients will be our competitive advantage going forward. The investments we made with our digital initiatives have been embraced by our advisors. And anecdotally, these tools are supporting asset consolidation.

Additionally, of course, we’ve seen over $250 billion of assets flows in Advisory over the last four years and continue to believe that at least half of our client assets will migrate to Advisory over the medium term.

Let’s talk about Investment Management on Slide 10. The asset management sector is both very large and extremely fragmented, lending itself to opportunities for growth in areas where we believe we can deliver differentiated value to our clients. And to me, one of the most exciting things we’ve done to capture this opportunity is product innovation illustrated by the number of new products we have developed. These products have broaden our revenue base, made us more relevant across the client spectrum and translated into material, revenue and asset growth.

Since 2016, we’ve launched many new products successfully, leveraging our global client franchise. We’ve already seen significant contribution from these products, generating $90 billion of incremental assets under management and almost $500 million of incremental revenue in 2019 versus 2016. These strategies, continued new product launches and investments in our client franchise more broadly will be a very important component of future growth.

Another key driver of growth is our existing diverse alternatives client franchise. If you see on Slide 11, our alternatives client platform is at scale and there is strong secular growth in private alternatives. In addition to new private alternative product launches noted on the prior page, we’re seeing strong organic growth in our existing high-performing private funds. For example, our infrastructure number three fund which closed in the fourth quarter is over 50% larger than Infrastructure II, raising $5.5 billion of institutional capital versus $3.6 billion, respectively.

Further, we continue to see very strong organic growth in our premier institutional core real estate strategy. Our alpha products across both private and public markets as well as our world-class global solutions capabilities will be critical contributors to Investment Management’s revenue growth. And our public active equity strategies has strong performance and global client footprint has driven robust net flows. We believe we ranked Number 1 in organic growth since 2017 among the top publicly-traded active equity managers.

So let’s turn to Slide 12. We expect that these and all our other growth initiatives, along with expense discipline, will drive further ROTCE expansion. In 2015, we communicated that we believe we were capital sufficient. And since that time, we’ve continued to deploy our capital to meet our strategic objectives. We look forward to the transition to the new capital regime and expect Morgan Stanley will be able to return excess capital to shareholders, while continuing to invest for future growth. Our robust capital position will enable us to pursue opportunities to invest in the franchise and return capital. We’re confident in our ability to deliver two-year ROTCE expansion at 13% to 15%.

I’ll conclude with our updated strategic objectives. The targets we expect to achieve in 2021 as well as our longer-term aspirational targets are shown on Slide 13. We’ve meaningfully and with intent transformed this business into what it is today. As we execute on the next phase of the firm’s journey, the objectives listed here, assuming a normal market environment, should result as a natural consequence. We believe that in 2021 Wealth Management will be a 28% to 30% pre-tax margin business and will exceed 30% over time. This business has compelling scale benefits. Between our core competency of serving ultra-high and high-net-worth individuals and our newer expansion into the workplace, there is clearly room to grow from here. Beyond Wealth Management, we’re making number — numerous investments across all of our platforms to enhance the digitalization of our firm and overall technological capabilities, giving — given our scale and other efficiencies.

We have largely been able to self-fund these investments. Between this and revenue growth, we expect to achieve an efficiency ratio 70% to 72% in 2021 and below 70% in the long term. As a result of these and all the other efforts, we expect our return on tangible common equity to rise to 13% to 15% in 2021. And over the long term, we aspire to have a return on tangible common equity of 15% to 17%.

Given our established track record, our competitive positioning and our continued investment into our business, we’re confident in our ability to achieve each of these objectives. I will now turn the call over to Jon, who will discuss our fourth quarter and annual results. And then together, we would take all of your questions. Thank you.

Jonathan Pruzan — Chief Financial Officer

Thank you, and good morning. The firm produced a record level of revenues in 2019. We had strong momentum through the quarter and finished the year on solid ground. In the fourth quarter, firm revenues were $10.9 billion, increasing 8% sequentially, contributing to full-year revenues of $41.4 billion. Fourth quarter PBT was $2.7 billion and EPS was $1.30, resulting in an ROE of 11.3% and ROTCE of 13%.

In the fourth quarter, severance expenses of $172 million related to a December employee action and intermittent net discrete tax benefits of $158 million, largely offset each other. For the full year, ROE was 11.7% and ROTCE was 13.4%.

Total non-interest expenses were $30.1 billion for the year. Non-compensation expenses were essentially flat to 2018 at $11.3 billion demonstrating our ability to self-fund incremental costs related to absorbing and integrating Solium and increased technology investments through continued discipline over our more controllable expenses, particularly marketing and business development and professional services.

We continue to actively review efficiency opportunities, including optimization of our global workforce through reduced dependence on contingent workers and leveraging our global in-house centers. We also see opportunities for vendor consolidation across the firm over time. This focus will result in continued momentum to control our non-compensation expenses and help us achieve the objectives that James just discussed. Compensation expenses increased 7% on a full-year basis. This rise included severance charges and significant movements in deferred compensation plans as well as increased revenues. Our full-year expense efficiency ratio was 72.7%, below our 73% target.

Now to the businesses. Our Institutional Securities business reported revenues of $5.1 billion, marking the best fourth quarter in over 10 years. Results were driven by strength in investment banking, especially advisory. Additionally, we did not see the seasonal slowdown in sales and trading or underwriting, typical of a fourth quarter. For the full year, ISG revenues were $20.4 billion, slightly below last year’s record level.

The compensation ratio for the quarter rose to 40.7%, reflecting a $124 million of severance related to the December action and the impacts of movements in investments associated with employee deferred compensation plans. After considering the impact of these items, the fourth quarter compensation ratio was approximately 36%. And looking at the full year, again after considering these adjustments, the compensation ratio was under 35%. DCP creates some volatility in this ratio, but as we have said many times in the past, it has a very limited impact to the bottom line.

Investment banking had the strongest fourth quarter in a decade, generating revenues of $1.6 billion. The sequential increase was driven by strengthen in advisory and seasonally robust results for underwriting. Overall, pipelines are healthy across products. The pace of M&A remains strong and we would expect the period of activity to extend. The global equity pipeline remains robust as many issuers target capital raises in the first half of 2020, particularly across healthcare, consumer and technology.

As we said before, the conversion from pipeline to realize remains dependent on market condition. In equity sales and trading, we retained our leadership position and are Number 1 globally for the sixth consecutive year. Fourth quarter revenues were $1.9 billion, down 4% sequentially. Strength in the Americas was offset by declines in EMEA and Asia.

In cash, we continued to expand our share across regions, which partially offset the impact of global market volumes. Prime brokerage performed well as client activity rose during the quarter with equity markets trending higher. And derivative revenues declined sequentially as lower volatility weighed on results. Fixed income sales and trading produced revenues of $1.3 billion, down 11% from a robust third quarter.

We continue to deepen our relationships with our client base. Results were driven by strong performance across the credit complex. Micro produced another solid quarter with well-diversified performance. Healthy levels of client engagement supported results. We continue to invest in our secured lending businesses, which performed well, and witnessed increased client interest from commercial real estate products.

Balance sheet velocity remains a focus in this business, and on a full-year basis improved from the prior year. Macro results declined versus the third quarter due to lower client activity. Commodities revenues also declined sequentially. However, client activity and further geographical diversification of the revenue mix supported results. On a full-year basis, fixed income was up 11%. Strong performance in micro outweighed the decline in macro where a difficult environment weighed on results in FX and rates.

Turning to Wealth Management. We reported fourth quarter revenues of $4.6 billion and pre-tax profit of $1.2 billion, resulting in a PBT margin for the quarter of 25.4%. Strong revenues were offset by higher seasonal expenses as well as a $37 million severance charge which had an 80 basis point impact on the margin. On a full-year basis, the PBT margin was 27.2%, representing a 100 basis point expansion over the last year. The business continues to illustrate the benefits of scale. While investing in this business and absorbing the Solium expenses, non-compensation expenses declined 3% from 2018.

Transactional revenues were $829 million, up 39% sequentially. Results were principally driven by gains and investments associated with employee deferred compensation plans, as well as improved retail engagement. Asset management revenues were essentially flat versus the prior quarter. On a full-year basis, asset management revenues were also flat as the large market decline in Q4 2018 impacted first quarter results.

Total client assets of $2.7 trillion, increased 5% sequentially and 17% versus the prior year reflective of broader market movements. Over the last several years, we have seen net new assets of approximately 4% of beginning period client assets. While these flows are an indicator of the health of the business, we continue to believe fee-based flows are a more relevant driver of near-term results. We had $25 billion of fee-based flows in the fourth quarter, a record. The shift towards advisory continued and fee-based assets now represent 47% of total client assets, up from 45% last year. Loan growth continues to be strong across products. Lending balances increased to $80 billion or 11% versus the prior year. We continue to see strong receptivity in our lending offering. Our investments into technology have better enabled our advisors to identify clients who would benefit from our lending product suite. This has been especially effective in securities-based lending.

We expect to continue to see strong receptivity resulting in loan growth of mid-single digits in 2020. Total deposits rose 5% sequentially. Within our bank deposit program, we have seen stable deposit level since May with a seasonal uptick in the fourth quarter. We continue to invest in new banking products and our high-yield savings product has also continued to gain traction. Our new money savings campaign has raised close to $14 billion since its March launch.

Net interest income was in line with last quarter. On a full-year basis, NII was up slightly including the impact of prepayment amortization. Over the next year, we would expect the full impact of 2019’s three rate cuts, the realization of the forward curve and the continued diversification of our deposits to offset the benefit of our lending growth.

As James discussed, we will continue to invest in our workplace offering and also build out our U.S. banks to drive further growth. That being said, we would expect the margin to rebound nicely in Q1 from its fourth quarter seasonal low.

Investment Management reported revenues of $1.4 billion in the fourth quarter. For the full year, revenues were $3.8 billion, representing a $1 billion increase from the prior period. Total AUM rose 9% to $552 billion, of which long-term AUM was $356 billion. We continue to generate strong positive net flows across major high conviction active strategies. Long-term net flows were $6.7 billion, the strongest in eight years. And we had another strong capital raising year capped off with the close of our $5.5 billion infrastructure 3 fund.

Asset management fees is $736 million, grew 11% versus the third quarter. Recall a significant amount of performance fees are recognized in the fourth quarter. Performance fees for the quarter were driven by strong results in our core real estate strategy and management fees increased on higher average AUM.

On a full-year basis, asset management fees increased 7% to $2.6 billion. Investment revenues were up $565 million in the quarter and $1 billion for the year. This line is primarily driven by carried interest which is earned from clients who are invested in our private funds. The increase this quarter and year was primarily due to an underlying investment’s IPO subject to sales restrictions within an Asia private equity fund. This event generated a significant amount of accrued interest revenue, the ultimate realization of which will depend on the monetization of the underlying position in the fund. As we have previously said, this line is lumpy.

Other revenues were impacted by an impairment of a legacy equity method investment and a third-party asset manager. Total expenses increased 52% sequentially. In particular, higher compensation costs are reflective of higher accrued carried interest compensation which was primarily related to the event I just discussed.

Non-compensation expenses were driven by higher BC&E expenses related to the launching of new products and reflecting our continued investment into this business. This business continues to grow and we expect it will be an increasingly meaningful contributor to total firm earnings. We continue to look for organic and inorganic opportunities to grow this business and to effectively meet the needs of our clients.

During the fourth quarter, we repurchased approximately 31 million shares or $1.5 billion of common stock, and our Board declared a $0.35 dividend per share. After considering $158 million and $348 million of intermittent net discrete tax benefits, our tax rates were 21.4% and 21.3% for the fourth quarter and full year, respectively. We expect our 2020 tax rate to be slightly higher or approximately 22% to 23% and will exhibit some quarter-to-quarter volatility.

Take it in full, we are pleased with the firm’s results this year. We entered 2020 with asset levels at new highs, healthy pipelines, constructive markets, engaged clients and a right sized expense base.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Glenn Schorr with Evercore ISI. Your line is now open.

Glenn Schorr — Evercore ISI — Analyst

Hi, thanks very much. Just curious, within your two-year objectives, what — particularly on the ROTCE, what capital return assumptions are incorporated into that? Is that steady state now or any changes from what we’ve seen in the last couple of years?

James P. Gorman — Chairman and Chief Executive Officer

Well, again, just from a tactic — technical standpoint, since we haven’t seen the new proposals which we think are forthcoming, it’s sort of hard to say what the future return profile looks like, other than it will be consistent with we’ve done prior until we have more information.

Glenn Schorr — Evercore ISI — Analyst

Okay. Fair enough. On the gain in that Investment Management, I guess, IPO out of a private equity fund, I’m assuming there’s a standard lockup and illiquidity discount. Can you tell us what that company is so we can track it, so we don’t have surprise ups and downs every quarter?

James P. Gorman — Chairman and Chief Executive Officer

I’ll give you some more information on that, but first I’d clarify. There is no illiquidity discount there. The company is public and it’s marked to the stock price on a daily basis. And you mentioned, it is in the Asia, one of our Asia PE funds. It was an investment we’ve made more than six years ago or the fund made more than six years ago into a China consumer products company. The company has been quite successful and grown quite nicely, and it went public in the fourth quarter on the Hong Kong exchange. And the IPO has performed quite nicely.

To give you some sort of context around the round numbers, the investment that we made was less than $50 million and the current investment value is approximately $2 billion. So, we have not only the carried interest, we also have a small LP investment in the fund. And so the ownership and carry is going to be fluctuating until we have the underlying investment monetized. So as of today, we’re comfortably above the preferred return threshold in that fund. But as I said before, it’s an unrealized gain. So, we’ll have more volatility if there is volatility in the stock price.

So just to sum up, given the size and given that it’s public, we would expect a little bit more volatility in that investment line in IM. And we would also expect corresponding volatility in the IM compensation line as the investment team has about half of the carry typically.

Operator

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

Christian Bolu — Autonomous — Analyst

Good morning. Maybe a question on Wealth Management. I believe you made — you recently made some changes to the comp grid that should be beneficial to Wealth Management margins certainly next year. I think the longer — the question is longer term. Can you keep pulling the comp lever? I guess, as I look at the industry, and what’s happened over the last decade, whether it’s in a warehouse consolidation, the demise of the broker protocol, more client stickiness because of lending and technology, it feels like you can do that, but probably curious with your thoughts on, using the grid to drive margins over time?

Jonathan Pruzan — Chief Financial Officer

Well, listen, I’ll take that. We’re not using the grid to drive margins. We use the grid to drive behavior to help us do a better job with our clients. So most of the changes of the grid over the last decade have been designed to do exactly that. They have supported asset based accounts; they have supported working with more sophisticated complex clients; they’ve supported larger producers who have been growing their business. So I don’t think of the grid as an expense item. I think of the grid as frankly what really reflects what we’re trying to do with the business and the best advisors embrace that and pay great stability among the top advisors as a result of that.

So Christian the changes this year were modest but within the changes that are under the covers there are more significant changes as you move compost effectively from one set of behaviors to another and ultimately the goal is to continue to professionalize the financial advisor workforce which is a fantastic group of people and being transformed in the last decade from producing something like 300,000 revenue, go over a million revenue per person and the grids got to be aligned with their interests as well and that’s something Andy and the team are very focused on.

Christian Bolu — Autonomous — Analyst

Okay, thanks. Maybe just to get back to the question, I think Glenn asked earlier on, because the ROTCE target does stand out, the 15%, 17%. It does catch one’s eye. Can you just — maybe just help clarify like what level of capital you assumed? Do you assume like the absolute dollar of capital level will go down over time and that’s how you get to 15% to 17%, I just, it would be great to get that sort of like clarification?

James P. Gorman — Chairman and Chief Executive Officer

Yeah, I’m probably going to disappoint you Christian, I will not give you exactly what you’ll need for your model to produce that answer. We run the business based upon a myriad of things that we see from global economic growth to market share we have in each of our businesses, to the capital we’re using to prosecute our earnings in those businesses. Our ability to drive efficiencies across the Group, net of investments that we’re making and we’re currently running an ROTCE around 13% and so the two-year objectives feel like there is no compelling reason why we would go below that. In any individual quarter, of course, these things bounce around as you’ve seen in — our numbers over many, many years but over that time period we think the 13% to 15% is a very reasonable expectation and assuming normal market condition we would deliver on that.

For the longer-term aspirations, it’s really speaking the way we see embedded scale, we have in our various businesses, what the longer-term growth projections looks like our ability to manage our expenses, you will see our non-comp year-over-year are essentially flat this year, which — and modestly it’s pretty impressive given that we are investing in lot of parts of the business.

So if you just roll the math forward and make reasonable capital assumptions, you get to those ROTCE numbers of 15% to 17%. There is, as always, through the CCAR on the capital process, a kind of wildcard. How much do you ask for? What’s the stock trading at when you’re doing your buy backs, do increase the dividend? Are we going to make other acquisitions or investments along the way? There are a lot of things that drive the longer term. But what we’re trying to set when we said longer term, is what do we believe the potential for this business is?

Many, many years ago, when our Wealth Management margins were around 10% or 11%, we set a target of 15%. And I said publicly, I thought I could get to 20% and obviously we exceeded that and the whole transformation of the business helped on that. Many years ago we set an ROE target of 10%, when I think our ROE was around 2% or 4%, and we were constantly asked on this call when are you going to get there like, the kids in the back seat in the car saying when are we going to get there, when are we going to get there, and we kind of got there. And our feeling now is there’s no compelling reason with normal economic growth and good discipline around expense management and the embedded scale in our businesses and the strength of the culture, why these return shouldn’t be achievable over a longer-term period.

Operator

Thank you. Our next question comes from Brennan Hawken with UBS. Your line is now open.

Brennan Hawken — UBS — Analyst

Good morning. Thanks for taking the question. A question on the pre-tax margin target here in Wealth over the next two years. Good to see you guys expecting a nice step-up. Could you talk a little about the market and revenue assumptions embedded within that target? And at this point, you guys seem to have implied generally, especially with your comments just a minute ago, James, that about non-comp flattening out here in 2019 that we should be expecting self-funding of an investment and a more stability in the non-comp as opposed to the growth of prior years. Is that fair?

Jonathan Pruzan — Chief Financial Officer

There’s a couple of questions in there. I think when we think about our budgets, we generally use conservative consensus views on markets and rates. And that’s what we’ve done here. The 28% to 30% margin target as you said is a nice improvement and continues to trend. It also gives us the flexibility to continue to invest in this business, which we will continue to do around our Shareworks platform and the Morgan Stanley at Work. We’ve done a lot of work around the digitalization which James talked about, which is critically important to the customer experience and the client experience. And we’ll continue to make investments there. And so I don’t think there is any outsized expectations around markets or rates, just what we see in the consensus view going forward.

James P. Gorman — Chairman and Chief Executive Officer

Yeah. I think, Brennan, — I think that we’ve finished the year at 27.2% obviously in fourth quarter and somebody probably asked us about it, so address a write-up was 25 and change. There is some seasonality. We had some severance expenses in there, DCP and other stuff. So as I said before, these things will bounce around quarter-to-quarter. I can’t guarantee where the first quarter is going to be, the second quarter, third quarter. But over a full year, we’re at 27.2% with normal economic growth. What we’ve done with the business, I think that 28% — I’ve been disappointed if we know that, that I just put that out there.

It can be higher than that. That’s why we put a range on it. Do we think it’s going to be over 30% in the next two years? No, we do not. And I think we’ve got to be responsible when we set these targets about what we think is a likely outcome not a three standard deviation outcome. What is the likely outcome and coming off a 27.2% margin, 26.2% I think the year before, approximately 25%, it’s kind of grinding high. Why is it grinding high? Well, as you bring incremental revenues in, the incremental margin on the incremental dollar revenue is higher than the embedded margin. So, we’ll grind higher.

Brennan Hawken — UBS — Analyst

Sure, sure. That’s — that makes a lot of sense. Clearly, the Solium should also — the Solium acquisition and integration should also help to [Phonetic]. Appreciate that. I think you made reference, James, in those comments too what the underlying margin might have been in the fourth quarter. I know, I think, Jon, you said 80 basis points from severance and wealth, so that gets you to 27%. There was some DCP, but I don’t think you talked about what impact that would have had on the Wealth Management margin. If you could please let us know that? And just a request, maybe I know it doesn’t impact the bottom line, but the DCP creates some noise around some of the underlying metrics which makes it — it can blur investor visibility into the underlying trends. It’d be really helpful if you could disclose that or consider disclosing that going forward.

Jonathan Pruzan — Chief Financial Officer

Yeah. So, just I appreciate the comment and we continue to give further thought to that, but we do give a reasonable amount of disclosure in the K around that. We try to highlight it to you when it’s a meaningful contributor based on meaningful swings in the marketplace across all the businesses. As I said before, the PBT impact is not material, generally speaking a dollar of revenue versus a dollar of comp expense. Your fourth quarter comment though we generated 25.4%, I think you said, with the 80 basis points we’d be at 27%, obviously we’d be a 26%. And then by definition, when you look at all of these ratios. They are negatively impacted by that dynamic, effectively one for one, it’s not precise, but that’s what we, to simplify, have been using and again appreciate the comment. And we’ll give it some thought, but we obviously feel very comfortable with the new targets that we laid out 28% to 30% on that margin.

James P. Gorman — Chairman and Chief Executive Officer

Brennan, you make a good point. It creates noise, I mean, I remember the old days when we used to have to deal with DBA on these calls, which would move. I think one year, it moved $6 billion and it sort of bizarre impact it head on our financials. Fortunately, we got, we managed to clean that up. The DCP, I mean, the funny thing is it’s kind of a good news story right, you actually wanted to be messing with the numbers like this in a positive way, because it means the stock has done well which people invested in and the markets are doing well. This was the year where, what was the S&P was up 25% and the stock was up 28%, 29%. So pretty unusual year and that’s why I think we’re seeing the outsized on this year.

I wouldn’t, I’d be — I mean, listen if that happens in 2020, I’ll be delighted and I don’t mind the noise if we get that outcome, but I’ll leave it to the accounting and controlling team to figure out what the right disclosures are, but that’s where we are.

Operator

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

Steven Chubak — Wolfe Research — Analyst

Hi, good morning.

James P. Gorman — Chairman and Chief Executive Officer

Good morning.

Steven Chubak — Wolfe Research — Analyst

So, appreciated some of the additional disclosure on the Wealth Management conversion target from share work. Certainly, that’s an area where, there is significant interest post the Solium deal. I recognize it’s a five to seven year goal. So, you certainly have a lot of time to execute on that conversion target. I was just hoping that you could maybe help us frame how we can think about, you have the incremental revenue, or even just AUM growth opportunity over that horizon, if you ultimately execute on that goal and just separately, do you expect the pace of onboarding to be somewhat linear or is it going to be more back-end loaded.

Jonathan Pruzan — Chief Financial Officer

Let me, let me try to answer that. I mean a couple of things, one, first of all we had, Solium was only in our results for eight months this year. I think we’ve mentioned before that it was dilutive to PBT, so obviously dilutive to margin. We’ll have the full effect of the acquisition this year, which will also be dilutive to margin and to PBT and then we would expect it to turn potentially PBT neutral or positive and then to build over time and improve the margin.

The conversions are, there is several stages as James mentioned, there’s just making sure that we get all of the, the corporate clients onto the Shareworks platform, that’s accelerating, that should be done this year. And then, integrating it into the Morgan Stanley at work — at Morgan Stanley at work platform will take another year. I think, we’ll see sort of an acceleration, a slow build, if you will, of converting, our Morgan Stanley at work clients into either the digital or advisory channel, but we think a million incremental customers on our current base would be quite attractive and a real nice growth engine.

Obviously, the potential for the different dynamics around the size of that client, i.e., whether it’s mass affluent versus ultra high net worth or high net worth, will have an impact to asset levels and cash levels and net new assets, but again incrementally. If we think we can bring on another million customers in five to seven years on top of our current existing a base, it’s why we’re so excited about the opportunity.

Steven Chubak — Wolfe Research — Analyst

Got it. And just one follow-up for me. I was hoping you could speak to some of the underlying assumptions, just specifically on the macro and maybe industry fee pool outlooks, particularly on trading and IB just supporting some of the near and long-term return objectives?

Jonathan Pruzan — Chief Financial Officer

I’m sorry. Trading, what did you say?

Steven Chubak — Wolfe Research — Analyst

Trading and investment banking fee pools as well as just kind of the underlying macro assumptions, underlying some of the return targets?

Jonathan Pruzan — Chief Financial Officer

Yeah. No, again. So I think that, we will obviously have to see where the pools come out this year. When everyone finishes reporting and we get the data, it looks like the pools are pretty stable. I think from a budgeting, — I think from a budgeting standpoint we generally think about those types of pools growing with sort of GDP. So sort of a, very limited or sort of a couple of percentage point type growth in the pool.

And then we coupled that with our view on investment dollars and share — and SharePoint. So that’s generally the macro backdrop that we use for the — for the budgeting, which will obviously tracked consensus views on GDP in US growth and so on and so forth.

James P. Gorman — Chairman and Chief Executive Officer

I just add, I mean we don’t, we don’t talk ironically as much about the Institutional Securities business which has sort of been our core and now lineage, since our founding 85 years ago, but in each of that we have a slide in there that shows in each of the five businesses, debt underwriting, equity underwriting, advisory M&A, equities and fixed income. They are able to gain share over that five-year period and this year they delivered their fourth consecutive 5 billion revenue quarter, and we’ve never had a year where we’ve had $4 billion, $5 billion quarters. I mean what, this business has been characterized by at least one and sometimes two pretty volatile and difficult quarters each year.

Now, we can’t, and it’s obviously more vulnerable to market swings, but I think what the team has done in balancing out the business. It stayed [Phonetic] on the group have made it a much more stable organization. I think within fixed income, the way that’s been turned around with stability that Sam and his team. I see, it gives us more comfort that we’ve got a lot more stability embedded in the business from Prime Brokerage financing through to the M&A, which remains very stable.

Obviously, you’re going to have volatility, but we think these shares are sustainable some places we could grow share, but it’s really a function of stability is what I’m very focused on for this business because the capital on the balance sheet, shall we say is stable, it stays there. So we need the revenues to be stable and that’s what they delivered.

Operator

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

Mike Mayo — Wells Fargo — Analyst

Hi, I’m wondering if your minimum targets are high enough. Slide seven through 11, highlight you — what you expect Institutional Securities, five year share gain should continue, Wealth Management is increased, client thereby by one-third, I’ll be over a longer timeframe, Investment Management and new products have digital initiatives, non-comp flat, it’s all going well and reported 13% our TCE last year and year, look for a minimum RGC of 13%. So why not raise that minimum four?

Sharon Yeshaya — Head of Investor Relations

Mike, we now go back, a long way and I’d have to say you’re a model of consistency. I think, I’m not sure we’ve ever had a call when you have announced for higher targets and it had to fell defensive when we’re talking about Wealth Management margins above 28% efficiencies at 70 plus percent and ROTCs at 13% to 15%.

Listen our job is to be as transparent and realistic as we can. These targets have one significant caveat, which is the markets, if the world collapses, there will be very difficult to meet and we will not be the only financial institution struggling with meeting whatever public targets, they have out there. We don’t run this place on the basis, the world is about to collapse and we have no evidence that 2020 is going to be a difficult economic year — difficult politically potentially geopolitically, but certainly, the economic outlook remains very, very stable.

So when we do the math and put the targets together we do it based upon a balance between what is that downside in a normal scenario and what is a realistic upside over the near term. Longer term, that’s great, that’s sort of, it’s fine and it’s interesting and it’s sort of saying what could we deliver aspirationally, and that’s probably where you’re headed in the longer term part of that chart, the right hand side, but in terms of running the business and in terms of thinking through our capital deployment and dividend strategy, compensation, all of our investments that we’re making. We really focus frankly on the two-year objectives and what I’ve always tried to do with these targets set, a range where the bottom of the range is what we should, we should be able to deliver in all normal circumstances. The top of the range is obviously a little more spotty.

So listen, I would love for us to deliver on your more aspirational views each year, but we can’t, we can’t reliably — we can’t reliably project that, so I don’t think we should reliably project it. And if you folks want to model in different numbers, that’s obviously your decisions, but we’ve got to do what we think is right.

Mike Mayo — Wells Fargo — Analyst

And just to follow up, slide seven and eight. One is the expectation to continue to gain share. I guess, the share gains in the European banks, that your expectations for that to continue and then on the Wealth Management side going into the mass affluent you’re going down market to the teeth of the Schwab’s zero commission for Wealth and after a number of years, it’s kind of moving back from the lower end clients. So just if you could address those two specific areas. Thanks.

Jonathan Pruzan — Chief Financial Officer

Yeah, well, I think the way we use sustainable share. We certainly don’t see our share going backwards in these businesses and there is clearly and different parts of the Institutional business, we think we can gain share in certain regions in the world where we are looking forward to getting our full China license there and continue to grow at our Asia presence, for example. So I feel — I feel good about these share numbers, you point out, there are different parts of the industry that are going through larger transitions, now those kinds of things we were doing several years ago.

So there is potential share upside no question about that we can’t model that because that would be, that would be pretty aggressive, but you can certainly — we certainly affirm that the share we have now, is stable. Normal market, environment growth that obviously translate into higher revenues and we think there’s some upside on share.

On the going down market, I think about differently and for sure commission pricing has been going to zero in small trades for a long time and there have been examples of that in the digital space for years. I think the move that Schwab made just accelerated what was something that have been happening for a long time and their business models are not build around their secondary commission revenues that I, you and I understand.

I don’t think about this, so much is going down market, I think it is about it is opening up a new segment to Morgan Stanley. There are basically three ways in which people have their wealth managed, one is through some sort of advice, whether it’s full service, private bank, trust bank, independent financial planner, financial advisors, and so on and we had very dominant that space.

The second is direct digital and there are a whole set of new platforms, but there were some very established at scale players in that space. And the third is the workplace and the workplace remains. There are certain players have been very dominant in it, but we think this is also a very interesting space, Solium gave us a leg into it. We see a lot of financial wellness, financial buys, financial planning that can be brought to employees. If they are into a default digital account when their stock plans are best for example that’s code of — that’s relatively easy for us to, to drive on a digital and direct platform. So I see it less sort of characterizing it is going down market, a more characterized is just expanding the universe of clients, there are a lot of people out there working companies, making good money through these share plans. They do not want or need one of our large financial advisor teams, that’s for sure, but that doesn’t mean they can’t have access to what Morgan Stanley can deliver.

Operator

Thank you. Our next question comes from Matt O’Connor with Deutsche Bank. Your line is now open.

Matt O’Connor — Deutsche Bank — Analyst

Good morning. I realize you don’t want to give all the details on the expense adjustments related to deferred comp, but I guess I’m trying to get a sense of the kind of full year efficiency ratio of 73, as I think about kind of getting the 70, 72. It would be helpful if could you give us kind of the clean base for this year, either now or I guess it’s probably come in the K, but it would be helpful. Just to get that base and I guess my question is, if you don’t want do that, that’s really just as we think about the efficiency improvement. Can you just elaborate a bit on the drivers. Obviously, it’s a little bit of revenue growth as you talked about a little bit of growth in wallet and some the efforts to Wealth, but just maybe elaborate on. Is there opportunity to bring the comp rate down. And on the non-comp, is it about keeping it flat or maybe some opportunities to cut on an absolute basis. Thank you.

Jonathan Pruzan — Chief Financial Officer

Yeah. So I think I’ve given in the comments and we’ve given the comments and we here you on the DCP. So I’m just going to focus, you can see from our targets that we’ve lowered the efficiency ratio. We had a little bit of, we had a little bit of severance in there, and again the DCP adjustment would, would be — would also impact that ratio slightly, but I think when we think about expenses and expense discipline. We’re talking about expense discipline across all categories of expenses both comp and non-comp. We allocate resources at the firm level, which is why we have a firm efficiency ratio target.

Some of these ratio has got a lot of attention to them when they are, if you think about the comp ratio within ISG that’s only 40% or less than 40% of our comp versus the totality of the firm. We constantly have been focused on being disciplined on comp and non-comp.

What we will say is that we have been disciplined on comp if you — the only thing that we continue to try to do and we have done quite successfully is to pay our people competitively across all of our businesses as we try to attract and retain talent, but we’re disciplined across all those categories. When we get to the non-comps, we’ve been very focused on professional services as we’ve grown our businesses and we’ve grown, some of the digital and technology and digitalization of the firm, as well as complying with the regulatory agenda we relied on sort of contingent workers and consultants to help us build out this practice and as all of that has matured and turn more into BAU, we’ve been able to rely more efficiently on employees, which is why you seen in the head count grow even after the December action and so we’ve been able to take out some expenses there and optimize the workforce.

I mentioned vendor consolidation, we’ve done data consolidation in the past. So we’re constantly looking for opportunities in the non-comp space to continue to self-fund and drive efficiencies in those types of categories to the ones that I would to say that we’ll continue to focus on in the future and we all — we have finally seen some productivity gains around the significant investments that we’ve made in technology and digital and that’s led to some of the actions we’ve taken as well.

James P. Gorman — Chairman and Chief Executive Officer

I would just say something about the comp ratio, and I think it’s important to say it, years ago when we start on this journey, the ISG comp ratio was 62%. I think, if memory saves me and Wealth Management, I forget what is, but it was well under 60s and we had a long-term aspiration get, I think Wealth Management down to 55%, 57% and ultimately ISG to 40. We, the last time we publicly said a comp ratio goal for ISG. I think, it was in 2015, which was 37% and we’ve managed in the last three or four years to be under that sometimes 34% this past year was a little higher and we had some stuff going on as we’ve talked about, but we also have started moving.

We’ve had a lot of contractors and contingents around the world, working for us 10s of thousands actually and we’ve decided as part of our restructuring offshoring we’ve moved some of those folks in as permanent employees, most stability with that, we have preferred a lot of reasons. I don’t need to go into in this call, that then becomes part of the comp pool. So I don’t want to be tied to a comp ratio when we really managing the firm for overall expenses. So that’s what we’re going to manage for and there is a reason, you’re not seeing new comp ratios in these numbers, but you’re seeing — a pretty aggressive efficiency ratio.

We want the ability to manage the firm for shareholders on best basis and that’s to have the best people working most efficiently. So where you will not see, you never going to see comp ratio is in the 40% in ISG and that’s — we’re not going to do that, but we just want to maintain flexibility to run the business and and not too goofy stuff like not make contingents employees because, we’re worried it will affect the comp ratio when in fact it brings down the non-comp ratio. So that’s we’re going to run the business on that basis and we’ve been doing that for a couple of years, but I just want to be explicit about it.

Matt O’Connor — Deutsche Bank — Analyst

Okay, that’s helpful color. Thank you.

Operator

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

Michael Carrier — Bank of America Merrill Lynch — Analyst

Good morning. Just a quick one for me. just an Investment Management. Do you guys have done well from product development and kind of growing that business. It does seem like on the private side, it’s more of your assets. We can see it in the performance fees in the carried interest. So I don’t know if you can quantify maybe how much of the AUM now has the potential to generate your carrier performance fees, it’s just something that’s obviously hard to model, but you also probably don’t get much credit for it because we don’t — kind of the magnitude of that. So any more clarity around that would be — would be useful?

James P. Gorman — Chairman and Chief Executive Officer

I would, again, the different categories that we break out obviously the alternatives generally are where we’re going to have carried interest of performance fees. We tried to give you some more information on that in this back and again it’s hard to model because as we said, there is some lumpiness to it, but we’ve had some really good performance across all of the strategies within IM. We’ve also seen stable fee rates across the platform. So as AUM has grown, we’ve, we’ve seen that fee-based revenue number grow as, again a year-over-year comparison. That was up 7%, which is quite healthy in this industry, given what you’re seeing across the complex. So again, we’ve tried to, to give you the information to do it, but as even with perfect information. These things are very difficult to project and model out.

Michael Carrier — Bank of America Merrill Lynch — Analyst

Okay, thanks a lot.

Operator

Thank you. Our next question comes from Gerard Cassidy with RBC Capital Markets. Your line is now open.

Stephen Dunn — RBC Capital Markets — Analyst

Hi guys, this is a Stephen Dunn, in for Gerard. Are there any products product areas within your businesses that you’d like to compliment with acquisitions?

James P. Gorman — Chairman and Chief Executive Officer

I don’t think, I don’t know that we can really talk about products and acquisitions. I mean there, most of the product gaps we have, we try and fill organically. Acquisitions, we tend to do for broader strategic reasons, either build scale and the business open up a new vertical, expand geographically, rarely would we do a significant acquisition or even a small acquisition, on a pure product, it’s more platform or a business units. So I think the short answer is no.

Stephen Dunn — RBC Capital Markets — Analyst

I understood. And just last question, we appreciate your targets for the next couple of years. Recognizing that you guys have changed considerably since the last time we’ve had a sustained bear market. Can you share with us the tools that you would use to mitigate revenue shortfalls that are likely in a bear market to try to help reach these goals, should have bear market that occur in the next two or three years.

Jonathan Pruzan — Chief Financial Officer

Expenses, I mean basically that’s your tool, right. Good news is with the bear market your stock flow, you’re buying back more shares, your EPS is growing because you share count down a share count peaked at about 2 billion and we are around 1.6 billion now. So we bought back nearly, I think nearly 100 million net shares last year when the stock was trading around 38 a couple of months ago. So that was a little gift, that god gave us.

So I think it’s, it’s very, it’s very hard to fight the market here in a sustainable bear market, you’ve got to restructure your organization to reflect that, you’ll become smaller more nimble and more efficient and we and all our competitors would have to go through that. You can’t plan the business based upon a bear market obviously, you got to plan the business based upon a normal market, not a bull market and that’s where we set our goals from, but as I’ve been very clear and I’ll finish on this note these goals are always subject to a normal market environment. If we have an abnormal market environment, one way or the other than the numbers will be what they will be, but they probably won’t be what’s on this page.

Operator

[Operator Closing Remarks]