Morgan Stanley Smith Barney dunked into the red in the third quarter, with earnings falling 67 percent versus the year ago quarter to $313 million, due to a sharp decline in the firm’s institutional securities business, which includes investment banking and capital markets. That’s down from a profit of $936 million in the year ago quarter, and $1.44 billion in the 2nd quarter.

But because of the steep drop in institutional securities business, Global Wealth Management carried the day: it was the firm’s most profitable division for the quarter, earning $281 million. That compares with $279 million in the asset management division, and $240 million in the institutional securities division.

Global Wealth Management’s profit was up just a hair from $280 million in the year ago quarter, as weaker commission revenues on client accounts were offset by higher net interest revenues. Clients stayed away from the market over the summer, as threats of a double-dip recession, a hard-landing in China and sovereign debt crisis hurt market performance. But President and CEO James P. Gorman said on an earnings conference call that retail investor trading activity appeared to bottom earlier in the quarter. Total revenues in the wealth management business were $3.1 billion for the quarter, up 3 percent from $3.0 billion a year ago and representing 46 percent of the firm’s total. Profit margins were 9 percent for the quarter, on par with last year, but up from 7 percent in the second quarter.

Despite a weak market, client assets grew on net basis versus last year, as did the share of assets that are in fee-based accounts. Total client assets grew to $1.6 trillion from $1.5 trillion a year ago, which includes net new client assets of $5 billion for the quarter. And the share of fee-based assets rose to 27 percent from 24 percent last year. “This represents a very strong Smith Barney legacy in this space, which is now being applied to Morgan Stanley,” said Gorman of the growing prevalence of fee-based accounts at the firm.

Meanwhile, the advisor force has stabilized, and turnover among the top two quintiles is well below the firm’s target said executives on the conference call. The total number of financial advisors slipped to 18,119 for the quarter from 18,160 a year ago. MSSB advisors are generating just a little bit more revenue, with annualized revenue per advisor at $686,000, up from $662,000 a year ago. About 30 percent of client assets correspond to clients with over $10 million in assets, about on par with last year.

As for the integration of Morgan Stanley and Smith Barney, which signed a joint venture agreement in early 2009, CFO Ruth Porat said the firm is half way through it. “The build out of the technology platform will be completed in the third quarter of next year, with key rollouts in 2012,” said Gorman. “It is a complex integration task, but we have no major concerns about our plans or progress.”

Morgan Stanley also continues to reduce its stake in “proprietary” asset management companies, announcing today that it is restructuring its ownership of hedge fund FrontPoint Partners. Morgan Stanley will take a minority state and FrontPoint senior management and portfolio managers, a majority equity stake. “Morgan Stanley remains a work in progress,” said Gorman on the call. “We are adopting a model more consistent with regulatory change emanating from the Dodd-Frank bill, reallocating our capital and balance sheet away from proprietary businesses.”

Elsewhere at Morgan Stanley, investment banking revenues reached $1 billion for the quarter, with Morgan Stanley ranking No. 1 in global IPOs, No. 2 in global completed M&A, No. 3 in global announced M&A and No. 3 in global equity. Asset management revenues totaled $802 million for the quarter.

Gorman expressed disappointment in the firm’s quarterly results. "Although we continued to make progress across some key businesses this quarter, our results in aggregate clearly do not reflect the true potential of Morgan Stanley's global client franchise and I am not satisfied with our overall performance," said President and Chief Executive James P. Gorman.