Morgan Stanley Smith Barney Increases Fee-Based Business


Earnings week has revealed a rather cautious mood among retail investors. Of course, that's understandable. Financial advisors I talk to say that their clients simply can't stomach the volatility --- even though, year-to-date, most equity indices are showing nice gains.

Schwab and TD Ameritrade reported lower retail volume. That said, as you read it here, both firms are successfully adding financial advisors. Morgan Stanley this morning reported "lower levels of client activity" (hence commission, transactional revenue were lower in the company's Q2. That said, asset management fee revenue, while flat over a year ago, still eked out something of an increase, demonstrating the industry wide trend toward fee-based business. MS said its global wealth management group enjoyed a nice increase in its pre-tax operating margin (12% in Q2 versus 9% a year ago).

Brad Hintz, of Bernstein Research, had this to say about the over all market yesterday in his report on Schwab's quarter:

"Retail is a much longer cycle play and the securities industry is only in the earliest stage of a recovery. Retail investors remain timid and continue to eschew risk taking. But these periods of investor conservatism do not go on forever. Of course, retail activity levels will eventually increase and client asset flows will ultimately grow at a more rapid pace. As they do, the stock and options commissions of Wealth Management franchises of the brokers will expand and the divisional asset management revenues will rise driven by the sale of mutual funds and growth of accounts. But all of this will take time. Until then, the delay of interest rates hikes well into 2013 and beyond will continue to plague mutual fund fee revenues and constrain net interest revenue. We think there is a better point later in the cycle for investors to own this stock [SCHW]."

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