Morgan Stanley said wealth management quarterly profits rose 6% year-over-year, buoyed by lower expenses which offset weaker transactional revenue.

The New York-based bank reported that net income rose to $509 million for the third quarter from $479 million for the same period a year ago.

"Wealth management has been a phenomenal business for us," CEO James Gorman said during a conference call with analysts.

Net revenues slipped 4% to $3.64 billion for the quarter, the firm said. Expenses, meanwhile, fell 5% to $2.816 billion from $2.973 billion. That drop was largely due to a 7% decline in compensation costs, which slid to $2.024 billion.

Gorman made further progress towards his goal of lower compensation relative to revenue. The comp ratio inched down to 56% from 57% for the previous quarter.

Market volatility during the third quarter hurt transactional revenue, which fell to $652 million from $912 million for the year-ago period.

"In August, we had a 1000 point drop in the Dow. That was not really constructive for our retail engagement numbers," CFO Jonathan Pruzan said during the conference call.


However, interest income helped offset those losses, rising to $777 million from $649 million, a 20% increase.

In recent years, Morgan has been pushing to grow the firm's mortgage, banking and securities-based lending in an effort to improve wealth management's profit margin, which increased to 23% for the third quarter from 21% for the year-ago period.

Morgan Stanley Wealth Management bank deposits rose 8% year-over-year to $139 billion, while loans to clients soared 27% to $61 billion.

The firm's leaders expect continued growth in those businesses, saying that there remain more opportunities to lend back to wealth management clients.

"I would say that the penetration rates in terms of FAs engaging with their clients is still high. We would expect that to continue," Pruzan said.


While comp costs declined, headcount actually rose by 36 during the quarter to reach 15,807 – the first time in several quarters that Morgan's advisor ranks did not shrink. Pruzan attributed this to lower attrition.

Advisor productivity dipped slightly to $922,000 per advisor from $929,000 for the year-ago period.

Client assets also fell, dropping to $1.925 trillion from $2.034 trillion for the previous quarter and $2.003 trillion for the same period a year ago.

That fall mirrors a similar decline at Merrill Lynch, which reported that client assets shrank to $1.942 trillion from $2.004 trillion for the year-ago period, a 3% drop.

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