The pre-tax income for the third quarter includes $193 million in one-time costs for both the purchase of the additional 14% stake of Smith Barney that took place in the third quarter, as well as the integration costs associated with Morgan Stanley Wealth Management. That compares to wealth management pre-tax income of $393 million in the second quarter.
The wealth management business’s pre-tax margin was 7% for the third quarter, or 13% on an operating basis excluding the $193 million costs. That follows a 12% pre-tax margin posted in the second quarter, 11% in the first quarter and 7% in the fourth quarter of 2011. Morgan Stanley has said the firm is striving to reach a pre-tax margin in the mid-teens by next year.
Wealth management net revenue of $3.34 billion marked an increase from $3.30 billion in the second quarter of this year, but a decline from $3.41 billion in the first quarter.
“We are beginning to unlock the full potential of the global wealth management franchise, having increased our ownership of, and agreed on a purchase price for the rest of, Morgan Stanley Wealth Management,” Morgan Stanley Chairman and Chief Executive James Gorman said in a statement. “I am confident in our potential to enhance profitability and increase value for our shareholders in the quarters ahead.”
Morgan Stanley’s number of global representatives in the wealth business was 16,829 for the third quarter, giving the firm a decline of 105, or just six one-tenths of one percent, for its financial advisor headcount. That decline has slowed from a loss of 259 in the second quarter of this year, and 319 in the first quarter. The advisor losses that Morgan Stanley saw this quarter came mostly from lower end producers, according to the firm. Productivity also rose 2% to $790,000 in annualized revenue per global representative from $775,000 in the second quarter.
Total client assets came in at $1.8 trillion for the quarter, while global fee-based asset flows totaled $7.5 billion. The firm’s clients had 31% of their assets in fee- based accounts, for a total of $556 billion.
Asset management fee revenue rose 3% from the third quarter of 2011 to $1.8 billion as flows and fee-based assets increased. Transactional revenue was unchanged from the same quarter last year at $1 billion.
Compensation expenses rose to $2.1 billion versus $2 billion one year ago. Non-compensation expenses rose to $1 billion versus $884 million last year, mostly due to $176 million in one-time costs that came from the wealth business’s integration.