In the ever shifting landscape of banks, brokerage firms and service providers, Morgan Stanley confirmed they are acquiring e*Trade Financial Corp. While the media discusses the business rationale and the impact to general investors, I'm interested to see how this impacts e*Trade's stock plan services business and the participants of those plans.
Stock plan administration is often an overlooked child of a brokerage firm. It's a very different business than traditional brokerage services, but utilizes the brokerage for trading, custody, etc. e*Trade has become a large player in the stock plan administration business by amassing a large clientele of employers utilizing their plan services and share trading. In my experience working with plan administrators at both the employers and the services providers, e*Trade has often been chosen for reasons where others have fallen behind. Areas such as technology, user experience and cost. The question then becomes, how will Morgan Stanley ownership impact those participants over time?
This was especially true when administrators (think the big Wall St. banks and brokerages) internally debated whether to stay in this business or drastically alter how they operate it during and after the financial collapse of '08.
An interesting comment in the statement from Morgan Stanley regarding this acquisition said "...the acquisition marks a continuation of Morgan Stanley's decade-long effort to rebalance the firm's portfolio of businesses so that a greater percentage of firm revenues and income are derived from balance sheet light and more durable sources of revenues,". The reason that's interesting is because depending on how you look at it, the stock plan business requires significant capital to operate and may not be so "balance sheet light". This was especially true when administrators (think the big Wall St. banks and brokerages) internally debated whether to stay in this business or drastically alter how they operate it during and after the financial collapse of '08. This was largely due to substantial capital requirements with low trading commissions, low revenue and low wealth management conversions. This may show the risk of a future desire to either turn up the revenue in this business (by increasing cost to employers, employee trading fees or other fees) to justify it's capital demands or an eventual exit of that business segment. That might not become clear today but during the next market retreat could again become a real issue.
Based on Morgan Stanley's 2019 acquisition of Solium, I would venture to guess this business is an asset Morgan Stanley hopes to retain and leverage. Maybe they'll look to cross selling and marketing to stock plan participants on the e*Trade platforms. Many employers have restrictions in place to limit marketing from the plan administrator (i.e. Morgan Stanley or e*Trade) and would be a hurdle they would need to clear creatively. Maybe they combine e*Trades shareholder business with Solium and spin those out some day.
Ultimately, my outsiders expectation for the near term is business as usual. Long-term will likely be impacted by a collection of market forces, leadership goals and revenue demands. Just don't be surprised in the future when your email alerts start including offers to sell you a loan...
-Tim Golas, Partner @ Spurstone - Architects of Executive Wealth
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This information is for educational purposes only and should not be construed as specific advice. Spurstone is a privately-owned, Connecticut-based fiduciary firm that specializes in advising stock-compensated corporate executives across the country. Visit www.Spurstone.com. Advisory services provided by Spurstone Advisory Services, LLC.