* Asset-based fee accounts jump to 35 percent of all accounts
* Expenses fall following completion of Smith Barney integration
* Brokerage division revenue up 5 pct
* Broker headcount down 442 to 16,284
By Jed Horowitz
NEW YORK, April 18 (Reuters) - Morgan Stanley's big bet on wealth management continued to show strength during the first quarter, as profit from the brokerage division jumped 29 percent to $255 million, the company said Thursday.
The profit excludes $121 million of pretax income that was returned to Citigroup Inc for its ownership stake in the brokerage unit. Morgan Stanley, which bought a majority of Citi's Smith Barney business in January 2009, expects to buy the remaining 35 percent by the end of this year, Chief Executive James Gorman said on a conference call with investors.
Gorman, who once led rival Merrill Lynch's brokerage division, views wealth management as more stable than the trading and investment banking activities that were long Morgan Stanley's hallmark. The bank racked up billions of dollars of trading losses during the financial crisis.
Morgan Stanley Wealth Management, the world's largest brokerage as measured by its more than 16,000 brokers, contributed about 41 percent of the New York-based firm's total operating revenue of $8.48 billion in the first quarter.
That is down from 45 percent for all of 2012 because investment banking activity rebounded in the first quarter.
Gorman on Thursday touted wealth management's record quarterly profit as emblematic of Morgan Stanley's success. The unit, which offers investment advice and sells stocks, bonds and funds to wealthy individuals and families, generated a pretax profit margin of 17 percent, up from 12 percent a year earlier.
Expenses in the wealth group fell 1 percent to $2.9 billion, in part because the integration of Smith Barney onto its brokerage platform was completed late last year.
Measured by a more conventional metric of profitability, the wealth unit, along with most other Morgan Stanley businesses, posted a single-digit return that pales in comparison with its profitability before the financial crisis.
Return on average common equity, reflecting how well the bank mobilizes equity investments from shareholders, was 8 percent in wealth management, up from 6 percent a year earlier but below the double-digit returns that retail brokerage activities typically generate.
FEES FLOW IN
To offset lingering fears about the stock market among retail investors, Morgan Stanley and its rivals have been promoting fee-based accounts that charge commissions because they produce revenue regardless of whether clients buy and sell stocks, bonds and other investments.
By that measure, Morgan Stanley thrived in the first quarter. Fee-based accounts as of March 31 were up 21 percent from a year earlier to $621 million, or 35 percent of total client wealth management assets of $1.8 billion. A year earlier, fee-based accounts represented 31 percent of such assets.
Morgan Stanley attracted $15.3 billion of new money into fee-based accounts in the first quarter, up 50 percent from a year ago. Bank of America Corp on Wednesday reported that clients at Merrill and its other wealth management businesses added $20.4 billion to fee-based accounts in the first quarter.
Total client assets at Morgan Stanley Wealth Management rose 8 percent from a year earlier on investment gains as well as new money gathered by brokers.
The bank, which has whittled down its wealth management training program, ended the quarter with 16,284 brokers, down 442 from the beginning of 2013. Merrill Lynch is the second-biggest brokerage with 14,474 brokers.
The average Morgan Stanley broker oversaw $110 million of client assets in the latest quarter, up 10 percent from a year ago.
Morgan Stanley this year moved about 428 brokers in Europe, the Middle East, Asia and Australia into the equities division of its international securities group, no longer including them in its wealth management tally.
The company's brokerage branches, which it has been reducing as it consolidates offices with Smith Barney, fell 5 percent from a year ago to 691.
Shares of Morgan Stanley were off 3.7 percent to $20.68 in morning trading on the New York Stock Exchange.