Morgan Stanley Wealth third-quarter profit soars on fee revenue

Morgan Stanley, which has made a bigger bet on wealth management than any other major U.S. investment or commercial bank, said third-quarter pretax profit at its wealth unit more than doubled to $430 million from last year on asset management fees that hit $1.9 billion.

Profit margin, an internal benchmark that Chief Executive James Gorman has promoted as his measure of success in wealth management, more than doubled from last year to 19 percent, flat with this year's second quarter. The measure had stubbornly stayed in single digits for several years despite Gorman's initial prediction of at least a 20 percent margin.

Pretax profit in the business rose 187 percent from a year ago and 32 percent from this year's second quarter to $430 million on revenue that increased 8 percent from a year ago to $3.48 billion. Total expenses for the wealth unit fell 5 percent from a year ago and 2 percent from the second quarter as spending on integrating Smith Barney ebbed.

The July-to-September quarter, typically a sluggish period in retail brokerage, was the first in which Morgan Stanley owned 100 percent of the former Smith Barney after buying Citigroup's remaining 35 percent interest in the joint venture at the end of June. In last year's third quarter, Morgan Stanley shared

$9 million of the unit's profit with Citigroup.

The third-quarter report showed success in virtually every part of the company's strategic plan to book steady fee income from rich people to offset the volatility of its trading and investment banking businesses.

At the end of the third quarter, about 36 percent of client assets in the wealth division were in fee-based programs, up about one percentage point from June 30. The unit's total assets rose 8 percent from a year ago to $1.8 trillion and were up 3 percent from the second quarter.

Morgan Stanley's focus on wealthy families and individuals and its use of bonus and incentive plans for its brokers also bore fruit. Assets of clients with $10 million or more increased 20 percent from a year ago and 4 percent from the second quarter to $631 billion, or 35 percent of total assets.

Traditional trading commissions, which are being de-emphasized by big brokerages, nevertheless rose 16 percent from a year ago and 42 percent from this year's second quarter to $317 million.

Even the units brokerage force, which industry-wide has been falling as firms cull low producers, inched up 1 percent from a year earlier - and from this year's second quarter - to 16,517, confirming Morgan Stanley's status as the biggest U.S. brokerage.

On Wednesday, Bank of America's Merrill Lynch wealth division reported that its broker count fell almost 7 percent from a year ago to just over 14,000 as of September 30.

The wealth management unit at Morgan Stanley contributed 43.8 percent of the company's total revenue of $7.9 billion and 49.8 percent of its $1.3 billion pretax profit from continuing operations.

That positions wealth as the largest profit generator of the company's three main businesses, which also include institutional securities and investment management.

(The story has been filed again to correct profit in the first paragraph.)

(Reporting By Jed Horowitz; Editing by Steve Orlofsky)