Due Diligence

Morgan Stanley Smith Barney Q4 Weak, Margins Dip, Net New Assets of $6 Billion

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morgan-stanley-88373574Morgan Stanley’s wealth management group had a rough fourth quarter due to continued weakness in the market, which slowed the integration of Morgan Stanley and Smith Barney. Revenues were off 3 percent versus the year-ago quarter to $3.25 billion, while pre-tax income declined 37 percent to $244 million. Pre-tax profit margins slipped to 8 percent from 11 percent in the third quarter and 12 percent in the prior year.

Bernstein analyst Brad Hintz was disappointed with revenues and margins, while the integration is about a year behind schedule, he wrote in a note. But management is aggressively cutting costs, and shifting to lower payout products, he wrote. He has hope.

Even this segment “has a faint light at the end of a tunnel,” wrote Hintz. “The long delayed technology platform that will allow the expense initiatives to accelerate are expected to be rolled out in 2012 and management is aggressively attempting to boost performance in the meantime by right sizing training, reducing offices, improving overhead and accelerating the shift to lower payout (ie. higher margin) products. And while MS may still be over a year away from the previously promised 15 percent [pre-tax margins] for retail, management is talking about achieving parity with Merrill Lynch margins by 2013.”

Morgan Stanley Smith Barney’s asset management revenues were down 7 percent as fees are based on asset levels at the close of the prior quarter, while commission revenues were down 6 percent versus the third quarter. Trading revenues were up versus the third quarter, driven by markups in deferred compensation plans, but this was offset by compensation expense.

Total client assets rose 5 percent versus the third quarter to $1.6 trillion due to market appreciation and net asset inflows of $6 billion in the quarter, said chief financial officer Ruth Porat on a conference call. Global fee-based asset flows totaled $4.9 billion, bringing total fee-based assets under management to $496 billion at quarter end, up 6 percent year-over-year. Global fee-based asset inflows for 2011 were $43 billion, the highest since Morgan Stanley and Smith Barney joined forces.

“We are focused on growing this portion of flows because they enable to us deliver the best of our content to clients while building stable fee revenue and are more relevant to the economics of the business,” said Porat.

Morgan Stanley Smith Barney shed just over 130 financial advisors in the fourth quarter, bringing the total down to 17,156 at quarter end. Meanwhile, as the firm continues to integrate the Morgan Stanley and Smith Barney platforms, the firm “harmonized” the definition of what qualifies as a financial advisor, which resulted in an FA headcount increase of approximately 500. The new definition includes all personnel who are series 7 registered, spend a significant amount of time with clients and are primarily engaged in investment analysis, management and advice, according to spokesperson Christie Pollak. So an advisor who works on a team on portfolio management would be included, while a person who worked on a team in marketing would not. Turnover in the firm’s top 2 quintiles was at the lowest level since the fourth quarter of 2009.

The firm is in the final stages of its integration of MSSB, and the technology platform will be fully integrated by this summer, said CEO James Gorman on the call. Integration costs were approximately $73 million for the fourth quarter.

Read about Morgan Stanley’s third quarter earnings here.

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