Heads still rolling at MSSB

Still focused on cutting dead weight; assets down 8%

Oct 19, 2011 @ 3:23 pm

By Andrew Osterland

Morgan Stanley in the third quarter continued to cut the number of financial advisers in its joint venture retail brokerage, Morgan Stanley Smith Barney LLC.

“We are not focused myopically on our size but on the returns we generate for shareholders,” chief executive James Gorman said in a conference call with analysts this morning.

Mr. Gorman was speaking about the entire firm, including investment banking activities and institutional businesses that could be affected by regulatory changes. But the sentiment clearly applies to the retail brokerage business, as well. The firm ended the quarter with 17,291 advisers — down 347 from the previous quarter and down 752 since the beginning of the year.

“Greg Fleming [head of retail brokerage] is focused on expenses discipline and management. One example is the reduction in the number of financial advisers,” Morgan Stanley chief financial officer Ruth Porat said during the call. “He's focused on reducing the number of less productive FAs and that brings some cost savings.”

(For a look at the third quarter financial adviser headcounts, assets and productivity at MSSB, Wells Fargo and Bank of America-Merrill Lynch, click here.)

The reduced number of advisers didn't make up for the difficult market. Average revenue per adviser fell 5% in the third quarter to $747,000. That figure, however, is up 9% from the same quarter last year.

Total client assets dropped 8% in the quarter to $1.56 trillion, despite new client asset inflows of $15.5 billion — the biggest quarterly inflow since the inception of the joint venture, according to Ms. Porat.

As was the case with Bank of America Corp., which reported earnings yesterday, wealth management was a bright spot in a difficult quarter for Morgan Stanley. Revenue from the division totaled $3.3 billion, down 8% from the second quarter but up 3% from the same quarter last year. The full profit of MSSB was $221 million, with $169 million of that attributable to Morgan Stanley. And the division had a pre-tax profit margin of 11%. Morgan Stanley as a whole would have earned just 2 cents per share, excluding a $3.4 billion accounting gain from the falling value of the firm's own debt.

Mr. Gorman reiterated his intention to buy Citigroup's minority stake in MSSB. Morgan Stanley has a call option to purchase another 14% share of the joint venture by the end of next May. With Morgan Stanley's stock down 40% so far this year, however, how he will pay for it remains to be seen.

“We intend to own this business,” Mr. Gorman said. “The stock is not where we think it should be, but May is a long way off.”

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