Morgan Stanley wealth unit profitability jumps, nears 20 pct target

Thu Jul 18, 2013 2:18pm EDT

* Pretax profit up 60 percent to $655 million

* Pretax profit margin 18.5 percent

* Expenses up due to integration costs

By Jennifer Hoyt Cummings and Jed Horowitz

NEW YORK, July 18 (Reuters) - Morgan Stanley's bet on wealth management bore fruit in the second quarter as profitability in the bank's brokerage unit jumped, moving closer to management's target.

Morgan Stanley, which has made a bigger bet on retail brokerage than any of its peers, said the wealth unit's pretax profit margin was 18.5 percent in the quarter, up from 12 percent a year earlier and 17 percent in the first quarter.

Chief Executive James Gorman, who engineered the purchase of Citigroup's Smith Barney to create the world's biggest brokerage, has set a profit margin goal of between 20 percent and 22 percent by the end of 2015. Just a few years ago, profit margin was stuck in single digits.

The wealth unit's pretax income from continuing operations jumped 60 percent in the second quarter to $655 million. That figure is divided by net revenue to calculate pretax margin.

At the end of the quarter, Morgan Stanley completed its purchase of Citigroup's remaining 35 percent stake in their brokerage joint venture, but it has not yet realized the full benefits of the acquisition. "We think there's more upside there," Chief Financial Officer Ruth Porat said in a conference call.

Expenses in the wealth group rose 3 percent to $2.87 billion in the second quarter. Porat attributed the increase to integration costs, including branch consolidation and advertising.

MORE AGGRESSIVE

For the firm's more than 16,000 financial advisers, average revenue per adviser climbed 12 percent from a year earlier to $866,000, while client assets per adviser rose 10 percent to $109 million.

Morgan Stanley and other big firms are encouraging brokers to build fee-based - rather than commission-based - businesses. At the end of the second quarter, 35 percent of client assets were in fee-based accounts, up from 31 percent a year earlier.

Total fee-based assets rose 24 percent to $629 billion in the quarter.

Rising markets and a growing appetite for risk among wealthy investors helped advisers attract $10 billion of new fee-based money in the quarter. That dwarfed the $3 billion collected in the year-earlier quarter but was down from $15.3 billion in the first quarter.

Morgan Stanley's adviser headcount stood at 16,321 at the end of the second quarter, down 157 from a year earlier but up 37 from the first quarter. A Morgan Stanley spokesman attributed the year-over-year decline to continued attrition in the company's adviser training program.

Rival Merrill Lynch ended the second quarter with 14,172 advisers, down from 15,381 a year earlier, the Bank of America Corp unit said Wednesday.

Pretax profit margin at Merrill Lynch's wealth management and private banking unit climbed to a hefty 27.6 percent in the latest quarter.

Although Morgan Stanley's wealth management unit trails its rival in profitability, analysts applauded its second-quarter performance.

"They're finally showing progress," said Shannon Stemm, an analyst at Edward Jones. "It basically gives the market evidence - a reason to believe what they're saying."

Overall, Morgan Stanley posted a 42 percent increase in quarterly profit on Thursday. Profit at the wealth management unit attributable to Morgan Stanley rose 83 percent.

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