Morgan Stanley
Q4 2020 Earnings Call Transcript

Published: 20 Jan 2021

[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 the strategic update, and 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 our strategic objectives. The reconciliations of these non-GAAP adjusted operating performance metrics are included in the notes to the presentation.

[James Gorman:]

Thank you, Operator. Good morning, everyone. Thank you for joining us. And I fully appreciate we're competing with a 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 of E*TRADE, received an upgrade from Moody's to A2, we're placed on review for upgrade a second time, and announced our intent to acquire Eaton Vance. Then last month, following the Federal Reserve's release of its second stress test result, we announced the $10 billion buyback program that we intend to execute in 2021. Our performance and competitive position serve as 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. Then, 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 a younger demographic, who are on average over 10 years younger than those we have historically served, and who we can continue to service as their needs become increasingly complex.

[Jonathan Pruzan:]

Thank you, and good morning. The firm produced revenues of $48 billion in 2020. Records both with and without E*TRADE saw a 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.

[Operator:]

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

[Brennan Hawken:]

Good morning, and 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 -- do 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 to make a like-for-like? Thank you.

[James Gorman:]

Well, let me start, and Jon would talk about some of the disclosure stuff, and as you point out, Brennan, it's the first time I think we have done it in many, many years. And we just thought it was time to reflect the fact that 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're able to bring in $200 billion in a year. Now, part of that is obviously it's pro forma based, part of that is if you look at what E*TRADE is doing, they're doing great. Part of it is if you're in net attrition of financial advisors you will be in net attrition of assets on those advisors for the first time in 20-plus years I've been doing this we're not in 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're gaining assets from new advisors. Through the workplace initiatives, through Solium, and E*TRADES we are gaining assets from the conversion and keeping those assets at high 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 our client asset growth at the firm. And it's no single thing. I do think 6%, that's a -- as I've used the expression before, it's a sporty number, but it's a long way from the 2% or the 3%-4% we're operating at. And I think it will be elevated. I don't think we're going to go back to 2%, but maybe 6%, that feels high. And certainly best-in-class to what the Street offers. But maybe Jon has more on the disclosures.

[Jonathan Pruzan:]

Yes, so the two critical exposures, the net new assets and then 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 can figure 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 is 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 that we do, and we thought it was appropriate to disclose it then.

[Brennan Hawken:]

Yes. It's -- no, that's great. That's very helpful clarification. And agreed the growth rate looks robust. I mean you regularly hear about how 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 or ceding 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 like a strong position competitively. And you flag a lot of 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 these $435 billion of unvested assets, my guess is that's the opportunity set. About how much of that tends to vest per year, is it about a quarter or 30%, and it's right to think about that as evergreen, right, like invest and then they're replaced with new awards in subsequent year? Sorry about the multipart question, but I think it's an important one. Thank you.

[Jonathan Pruzan:]

That's okay. So, we have integrated the sales team. We're going to market through our corporate clients with a consolidated sales effort. As you would expect, we're going to be very mindful of the integration of these platforms. I would highlight that they 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 unvested assets, and roughly five 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 vest 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:]

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:]

Hi. Well, you've clearly gained share this quarter of the year in capital markets and 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 banks say we're planning for 2019 levels for trading, some think it can maintain this pace, some say it's in-between. Kind of where do you fall out, and why, what do you see as the structural changes?

[James Gorman:]

Mike, it's very difficult to say. I mean just look at 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 do you finish. So, clearly, there is a lot of activity in the market. There is enormous fiscal stimulus. Our rates remain very low. I think the global economies are recovering. And I think the vaccine; if we get in the U.S. to a million doses a day for the next 150 days would be spectacular. So, there are a lot of industries that are continuing to look at share issuance, new IPOs coming, recapitalizations of different kinds, raising debt. So there's 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 bet 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 has started off strong, the markets are active, the economies are recovering globally, new administration has come in. It looks like we had a peaceful transition hopefully today. So, I am quite optimistic about it. I can't put a pin to say exactly where we're going to end up, but we're clearly gaining share. Our fixed income franchise has well recovered from the 2015 restructuring and 2012 lows. Our equities bounced and retain their number one spot again in what has been a growing equity fee pool. And clearly, that the banking revenue is about $2 billion for the quarter, there is a lot of M&A activity and a 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:]

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

[Jonathan Pruzan:]

Yes, generally, I think from my comments, Mike, we describe them as healthy across all products and all regions, with IPOs as a standout. As I said, M&A activity dialogues very active, pipeline very healthy. So, as James said, a very constructive start to the year with very healthy pipeline.

[Mike Mayo:]

All right, thank you.

[Operator:]

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

[Christian Bolu:]

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 for James, you seem to be really playing 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, as sort of range for organic growth that you would expect for the business. Thank you.

[James Gorman:]

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 have 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, our actual numbers of financial advisors went up this quarter, I think for the first time for years. So, I just trend to the conservative until I see more data. And do I think it's going to fall back to 2%, not at all. But if we could lock in 6% for the next 10 years, and we'd be bringing -- we're bringing $200 billion a year. I read about a lot of these online players that have got $20 billion in total. And we're brining 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. I just -- my instinct is 6% in $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 projecting 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 we -- I think we've got a different kind of company. The reason that the title of this presentation is called Morgan Stanley, an Inflection Point, the Next Decade of Growth is if there's one message I would like people to take away from it is we're in the growth phase of this company for the next decade. We've been in, as I 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 business, 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 very strong net new asset growth.

[Christian Bolu:]

Fair enough. Maybe switching over to capital, with the stock now trading well above book value, how are you thinking about prioritizing buyback versus dividends? I think in the past you have 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 Gorman:]

Well, the third leg to that conversation, very importantly, 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're paying out dividends at the moment of about $2.5 billion. So if we were 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 much for 17.4% and I think the threshold is 13.2%. I'm looking at Jon.

[Jonathan Pruzan:]

Yes.

[James Gorman:]

13.2%. Let's assume we carry, what, a 50-100 basis point buffer on our 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 described this before, half our company asset sort of yield component to it, very stable revenues and earnings, and we could clearly move the dividend higher and we'll, once the regulators permit that we have, clearly we have the capacity. On the book value, yes, I would have preferred to be buying stocks last year when we were at $27. Unfortunately, we couldn't do that, but I'm not troubled by buying a little of book value. And I don't think we can be 2Q we have 1.8 billion-1.9 billion shares outstanding, obviously through the issuance from the deal. So, I'd like to get us back to 1.5 billion type range over the next few years and we've got the capital, on 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:]

Great, high-class problem. Thank you.

[Operator:]

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

[Steven Chubak:]

Sorry, can you hear me? My apologies for that. I just want to start-off with a question on funding NII. I appreciate the disclosure on funding optimization and the drivers of some of the improved synergies from the initial guidance. I'm curious how much room there is to cut deposit costs further, it looks like your wealth management deposit costs are 24 bps, it's just running well above peers. And just a clarifying question regarding the NII guidance, 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:]

I'll do the first, last question first, which is that it was based on the fourth quarter, so sort of using a fourth quarter annualized as the right base to be thinking about again, we did have the full impact of both the transaction for the full 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 one basis points relative to our wholesale, that costs 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 E*TRADE.

[Steven Chubak:]

No, that's great. And just for my follow-up, big picture question, James, if you'll indulge me, I was hoping you could help us reconcile versus your prior target of 15% to 17%. What rate market and capital assumptions are underpinning your 17% plus ambition, and I guess if we started to think about the inflection and growth that you cited and maybe even some tailwinds from normalization, just higher rates, which would be more than 100 basis point benefit, greater realization of revenue synergy opportunities, further progress on the SCB, the direction of travel, there's 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 are 20% plus ROTCE as a reasonable long-term ambition just given the significant transformation that's underway.

[James Gorman:]

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

[Steven Chubak:]

You drive a truck with that range.

[James Gorman:]

Yes, 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 out belief. It's not just Disney Land. We believe we will deliver these numbers, and for some of the reasons you listed, rates 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 plausible, whether it should be 17 plus, 18 plus, 19 plus. We said to you three years ago, our aspiration was to have a 17 plus ROTCE, you know, we are also planning. 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 in it, we do some math, we stopped with that budget, we stopped with that operating performance in 2018, 2019, 2020 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 CT1, and you put all of that in a big washing machine and out 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:]

Thanks very much. James, I wonder if we could 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 is kind of embedded in those, your immediate and long-term targets implicitly with that? Thanks.

[James Gorman:]

I don't think you're going to see price compression of any significance across the wealth/res management platforms. It's really functioning a blend of asset types. So, for example, the wealthy of the clients, if you have clients with a $100 million dollars, 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 being close at 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 is going on under the numbers, but you brought a 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, lending and deposit product. On the asset management side I mean, listen if you driving performance in the active side, you can generate, you can hold your fees as they are. The underperformers lose their assets quickly when they lose their fees. So I'm not terribly bothered about, and if you knew the names of the three above it, you'll probably get some, there is a reason, they are more index-oriented, it's a different business model. Now we generate a higher revenue per dollar of assets, but we pay a higher revenue comp structure for Solium assets, but it's not exactly 30, 40, 50 basis point win as you know obviously.

[Glenn Schorr:]

Understood. Why don't we hear your words? Thanks. And then maybe if we could just bridge the gap, I think I know the answer to this too, but this was a pretty strong environment, you consolidated each -- the adjusted margin and wealth management of 24% of the medium term target - two year target at 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 Gorman:]

Yes, the business is growing. We had some additional expenses this year. For example, we made more contributions to our role, philanthropic and charitable efforts given what is going on with COVID, that cost is distributed across the businesses. We paid a one-time bonus to all employees owning less than I think $150,000 who don't receive bonuses, given the headcount and wealth management that disproportionately picks up 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 am doing my maths right, $18 billion, 180 million, so something like that. So it's not small numbers can move it around a 0.02, but I think with increased growth, increased efficiency, better conversion of the assets more as suppose in generating this average 58 basis points is how you bounce between the sort of 20 -- what did we say 24 to 30 range -- 26 to 30. Depending on the environment, I mean, we've started the strong that probably helps the point of 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:]

Thanks, good morning. First question just want to come back to some of the questions on organic growth and I liked the slide nine that shows $8 trillion in assets held away, essentially making the point that you already have the customer reach. And so I'm just trying to think about whether you view kind of all of that is potential wallet that you can go after or set another way. Are there any products that maybe you don't line up with $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 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:]

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 them to bring in all 8 trillion over time, but there is significant overlap as you note in these channels and in these wealth 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 retaining vested 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 the FA led model that we have. So again, a real opportunity and I liked 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 advisor group who is going to work with new clients, 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:]

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's some inflationary aspects in the 2021, kind of in 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 derive 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 expense out of the system based on what you've learned over the last 12 months?

[Jonathan Pruzan:]

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 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.

[Michael Carrier:]

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 E*TRADE and Eaton Vance operating at a better ratio, I think it's longer-term Wealth Management margin improving maybe 600 basis points, just what drives the conservative outlook like, are there areas that you want to assess significantly, either to continue to drive the growth, or there is potential improvement on that 70%?

[James Gorman:]

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 bounce around the markets, I don't know, maybe we're too conservative in the short run, but it doesn't change our behavior, I guess is what I would tell you, we are very determined right, this company for growth and for efficiency and for return. So it'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 relative two years this year, as I said, if you annualize the way this year started up we'll do better than the efficiency rate.

[Michael Carrier:]

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:]

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 use 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.

[Michael Carrier:]

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:]

Sorry, apologies for that. I thought the comments on net interest income outlook and 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 and the transaction revenues in wealth management because versus my estimates, 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:]

Sure. On the assessment management fees 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 have average effect and exit effect in terms of 2021. So now, at $1.5 trillion asset, we also have the benefit of the net new assets that we bring in over 2021. Though on an average basis, we would expect continued growth obviously in that line. We had over 10% 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:]

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

[Jonathan Pruzan:]

Sure. Well, I'll 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:]

Hi, good morning. Maybe we could talk a little bit 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 net new account growth of close to 900,000. 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:]

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:]

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

[Jonathan Pruzan:]

Yes.

[James Gorman:]

Yes and yes.

[Jim Mitchell:]

Okay, great. Thanks.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.