Morgan Stanley 1999 Annual Report Download - page 32

In the U.S., favorable market conditions and strong investor
demand for equity products contributed to a high volume of cus-
tomer securities transactions, including listed and over-the-counter
equity securities. Revenues from markets in Europe also benefited
from strong customer transaction volume, as improved economic
and market conditions in the region increased investor demand for
European equity securities. Commission revenues from markets in
Japan and elsewhere in the Far East increased, as improved eco-
nomic prospects within the region increased investor interest and
led to higher transaction volumes. Commission revenues increased
13% in fiscal 1998, reflecting higher revenues from equity cash
products, primarily from markets in the U.S. and Europe, as well as
higher revenues from derivative products. Revenues from U.S. mar-
kets benefited from high levels of market volatility, which con-
tributed to increased customer trading volumes. Revenues from
European markets benefited from strong customer trading volumes,
which were positively impacted by the generally favorable perfor-
mances of certain European equity markets and from the
Company’s increased sales and research activities in the region.
Commissions on derivative products increased as the high levels of
market volatility contributed to increased customer hedging activi-
ties and trading volumes. In both fiscal 1999 and fiscal 1998,
commission revenues also benefited from higher sales of mutual
funds and the continued growth in the number of the Company’s
financial advisors.
In October 1999, the Company launched ichoiceSM, a new
service and technology platform available to individual investors.
ichoice provides each of the Company’s individual investor clients
with the choice of self-directed investing online; a traditional full-
service brokerage relationship through a financial advisor; or some
combination of both. ichoice provides a range of pricing options,
including fee-based pricing. In future periods, the amount of
revenues recorded within the “Commissions” and “Asset Manage-
ment, distribution and administration fees” income statement cate-
gories will be affected by the number of the Company’s clients
electing a fee-based pricing arrangement.
Net Interest
Interest and dividend revenues and interest expense are a function
of the level and mix of total assets and liabilities, including finan-
cial instruments owned, reverse repurchase and repurchase agree-
ments, trading strategies associated with the Company’s
institutional securities activities, customer margin loans and the
prevailing level, term structure and volatility of interest rates.
Interest and dividend revenues and interest expense are integral
components of trading activities. In assessing the profitability of
trading activities, the Company views net interest and principal
trading revenues in the aggregate. In addition, decisions relating to
principal transactions in securities are based on an overall review
of aggregate revenues and costs associated with each transaction or
series of transactions. This review includes an assessment of the
potential gain or loss associated with a trade and the interest
income or expense associated with financing or hedging the
Company’s positions. Net interest revenues decreased 14% in fis-
cal 1999, reflecting the level and mix of interest bearing assets and
liabilities during the period, including liabilities associated with the
Company’s aircraft financing activities, as well as certain trading
strategies utilized in the Company’s institutional securities busi-
ness. Net interest revenues increased 44% in fiscal 1998, primar-
ily attributable to higher levels of revenues from net interest earning
assets, including financial instruments owned and customer mar-
gin loans. In both periods, higher levels of securities lending trans-
actions also had a positive impact on net interest revenues.
Asset Management, Distribution and Administration Fees
Asset management, distribution and administration fees include rev-
enues from asset management services, including fees for promoting
and distributing mutual funds (“12b-1 fees”) and fees from invest-
ment management services provided to segregated customer
accounts pursuant to various contractual arrangements in connection
with the Company’s Investment Consulting Services (“ICS”) business.
The Company receives 12b-1 fees for services it provides in promot-
ing and distributing certain open-ended mutual funds. These fees are
based on either the average daily fund net asset balances or average
daily aggregate net fund sales and are affected by changes in the over-
all level and mix of assets under management or supervision.
Asset management, distribution and administration fees
increased 24% in fiscal 1999 and 27% in fiscal 1998. The
increase in both periods was primarily attributable to higher 12b-1
fees from promoting and distributing mutual funds to individual
investors through the Company’s financial advisors. Higher rev-
enues from investment management services and the continued
growth in the level of client asset balances, which rose to $583 bil-
lion at November 30, 1999 from $438 billion at November 30,
1998, also contributed to the increase.
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