Morgan Stanley Wealth Management is gearing up for growth as it reported numbers from the first full quarter during which it owned 100% of its wealth management business.

Executives at the firm said on a conference call that the firm was beginning to witness the benefits of its acquisition of the remaining 35% stake in Smith Barney from Citigroup on June 28.  The firm posted a $668 million profit compared to $247 million in the same quarter last year as it reduced acquisition-related expenses and improved margins from 8% to 19% year-over-year.

“We are just beginning to see the benefits,” chairman and chief executive James Gorman said in the call. “Despite seasonality and a relatively subdued trading environment revenues were essentially flat and we improved our margins and profitability once again.”
Revenue at the firm remained relatively flat quarter-over-quarter at $3.5 billion, but was up from $3.2 billion in the year ago quarter, primarily driven by growth in the fee business. Asset management and administration fees were up 6% year-over-year at $1.9 billion while commissions fell 11% from the last quarter to $507 million, which the firm attributed to slower market activity. 

As firms move toward a more advice-centric model, fee-based account assets at Morgan Stanley rose to $652 billion, a 22% year-over-year increase. Thirty six percent of client assets were held in a fee-based account, compared to 32% a year ago. “The transaction business is declining and those assets are shifting toward recurring fee-based arrangements,” Sophie Schmitt, a senior analyst with Boston-based consulting firm Aite Group, said.

Morgan Stanley continued to leverage its wealth management business to drive growth across the company as the firm placed more emphasis on increasing the number of banking and lending products it provides to its wealth management customers. Total wealth management loans and lending commitments of $26.6 billion were up 45% from the year-ago quarter and 11% from the second quarter.

The firm was increasing its securities-based lending through portfolio loan accounts while also focusing on increasing the number of residential mortgages, Porat said on the call. The firm benefitted from a $21 billion influx in cash deposits from Citigroup shortly after the final purchase was finalized, which the firm was looking to use to help fund loan growth in the wealth management unit, she said.

“The focus really is deployment of those deposits to support loan growth both on wealth management and on the institutional side,” she explained. “That’s a very important area with additional upside in particular given the margins on loan products.”

At the same time, the firm cut back on expenses in the wealth unit by 2% as the firm streamlined operations. Morgan Stanley continued to combine branch office locations, cutting 26 in the third quarter. The total number of retail locations dropped 8% year over year from 709 to 650.

Porat said the cuts were driven by resource considerations and a market-by-market analysis and that the major consolidation was over.

“The question is do you have fully staffed offices within any market, a strong culture, no more room and no need to consolidate or should you consolidate,” Porat said. “At this point, the big reductions we’ve seen are behind us.”

The number of advisors at the firm hit 16,517, an increase of almost 200 during the quarter. That rise was primarily driven by record low attrition and an influx of new advisors into the firm’s training program.

On the whole, Morgan Stanley reported $7.9 billion in revenue, up from $5.3 billion last year, and net income of $888 million compared to a loss of over $1 billion the previous year. Gorman said on a call that the firm would continue to look to leverage the wealth management division to boost results.

“The strength of the old Smith Barney business at its core was its managed money program and the strength of Morgan Stanley at its core was the capital markets business,” Gorman said. “We continue to see each of those strengths populate the other side of the house now as we come together.”

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