Morgan Stanley wealth unit fuels jump in profits

Fri Jan 18, 2013 10:22am EST

* Wealth management leads other units in profit, revenue

* Adviser count falls modestly, production per broker rises

* Seeks to buy all of Smith Barney as soon as possible

NEW YORK, Jan 18 (Reuters) - Morgan Stanley executives made good on their promise to reap profits from the bank's burgeoning wealth management business, reporting on Friday that profit margins in the business soared in the fourth quarter.

The New York-based bank's global wealth management group provided more revenue and pretax earnings in the quarter than the investment banking and asset management divisions, and proved more profitable than many analysts expected.

Morgan Stanley has made a bigger bet on retail investors than its major rivals by buying most of Citigroup's Smith Barney brokerage. Revenue from the unit's brokers was up 8 percent to $3.46 billion in the fourth quarter, while profit after distributions to Citigroup soared 111 percent to $277 million.

Pretax income in the group, which focuses primarily on households that keep at least $1 million at the bank, more than doubled from a year earlier and from the third quarter, to $581 million.

Pretax profit margin jumped to 17 percent, from 7 percent a year earlier and in the third quarter, as revenue rose and expenses fell, surprising some analysts who forecast the company would have trouble meeting its target of a mid-teen margin by the middle of 2013. Greg Fleming, head of the wealth unit, has acknowledged that problems integrating the computer workstations of Smith Barney and Morgan Stanley advisers put profit goals years behind schedule.

Morgan Stanley bought its first stake of 51 percent of Smith Barney in January 2009.

Morgan Stanley Chief Executive James Gorman is betting that selling investments to the wealthy will be a stable business that counters the volatility in trading and raising money for corporations.

"Once you put it on the railway track it will always run," Gorman said of wealth management in an interview on CNBC Friday morning.

The bank hopes to accelerate its purchase of the 35 percent of Smith Barney still controlled by Citigroup, he said, and will own 100 percent within two years at the latest.

RECRUITING AND REDUNDANCY

Morgan Stanley kept its brokerage count relatively flat during the fourth quarter. It ended 2012 with 16,780 advisers worldwide, 49 fewer than three months earlier and down 732 from the end of 2011.

Bank of America Corp's Merrill Lynch wealth unit, once led by Gorman, said on Thursday that its brokerage count fell by 371 advisers during the fourth quarter to 14,917.

Morgan Stanley spokesman James Wiggins said most brokers who left the bank were "underperforming advisers."

In 2012, at least 243 veteran advisers who managed more than $39.2 billion in assets left Morgan Stanley, including several teams that managed more than $1 billion, according to moves tracked by Reuters.

In the fourth quarter, annualized revenue per broker at Morgan Stanley climbed 12.5 percent from a year earlier to $824,000, and rose 7.6 percent at Merrill Lynch to $935,000.

For years, big brokerage firms have been paying multimillion-dollar bonuses to recruit top brokers from one another, but Gorman said on CNBC that the recruiting wars have slowed down.

He also said investors are not in "total despair" over market behavior and the economy, but are confused. When that clears up, he forecast a wave of investing and trading, saying that "$90 billion is sitting there waiting to get into the markets."

Large brokerage firms including Merrill and Charles Schwab Corp reported huge flows of assets into brokerage accounts at the end of 2012 but very restrained trading. Morgan Stanley said its total client assets in wealth management at year-end were up 8 percent from a year earlier to $1.8 trillion, with 32 percent of the total in fee-based accounts that produce revenue whether or not clients trade.

Morgan Stanley last fall resolved a dispute over the value of Smith Barney, agreeing to a purchase price that valued the brokerage at $13.5 billion, much lower than Citigroup estimated. Given Friday's profit report, some analysts suggested Morgan Stanley low-balled its estimates of the unit's profitability by including high expenses it had in a troubled integration of the two units.

Wiggins, the Morgan Stanley spokesman, declined to comment.

Morgan Stanley as a whole beat analysts' profit forecasts, combining the strong wealth results with strong trading revenue and falling compensation costs. Its shares jumped 6 percent in early trading.

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