Morgan Stanley wealth arm sees 3Q profit surge

Morgan Stanley Wealth Management, the nation’s largest brokerage business by adviser head count, enjoyed a strongly profitable third quarter as the firm realized the benefits of completing its acquisition of Smith Barney.
Morgan Stanley’s wealth management division delivered a $430 million profit to its parent company last quarter as revenues improved moderately and expenses were tamed after the firm purchased the final portion of Smith Barney from Citigroup Inc. in June, according to a statement Friday by the company.
The brokerage joined its major peers, Bank of America Merrill Lynch and Wells Fargo Advisors, in delivering higher profits in the third quarter.
But despite some high-profile departures, Morgan Stanley outpaced those competitors in increasing its overall number of advisers, adding 196 during the quarter. The firm’s overall adviser head count now stands at 16,517, according to the firm.
Morgan Stanley chief executive James Gorman said in a conference call that the benefits of the acquisition and the recovery of the industry since the financial crisis included lower adviser turnover that reined in the firm’s compensation costs.
“If you look at where the wealth management industry now is — it’s very concentrated,” Mr. Gorman said. “There was a lot of attrition, a lot of moving of people between firms, and that is a tax on the industry.”
The productivity of Morgan Stanley’s advisers has increased, with the average representative drawing $848,000 in revenue on an annualized basis during the quarter, up 8.03% from the same period in 2012.
The profitability of the wealth management business helped lift Morgan Stanley’s third-quarter net income to $906 million, or 45 cents a share, compared with a loss of $1.02 billion, or 55 cents, a year earlier.
Mr. Gorman has made Morgan Stanley more reliant on retail-brokerage revenue while decreasing the amount of capital allocated to fixed-income trading.
Chief financial officer Ruth Porat said that the firm intends to accelerate lending as it receives $57 billion in deposits from Citigroup as part of its Smith Barney purchase.
Asset flows into the brokerage’s fee-based accounts reached $15 billion, a 120.6% increase from the third quarter last year. Total client assets are $1.83 trillion, up 7.92% from last year.
Mr. Gorman said in June the firm’s wealth management unit can earn a pretax margin of more than 23% by 2015 as interest rates and stock markets climb. On Friday, he said the unit can achieve a 20% to 22% margin absent any changes in the broader markets. That pretax margin was 19% last quarter.
“The broader industry structure is more accommodating to better performance overall,” Mr. Gorman said.
Morgan Stanley shares traded up 2.68% to $29.70 in early afternoon trading.
(This story was supplemented with reporting from Bloomberg News. )