The fourth quarter brought mixed news for Morgan Stanley’s retail brokerage, which is struggling to turn itself around post-Phil Purcell. Pretax earnings soared 65 percent to $84 million on net revenue of $1.3 billion (21 percent better than a year ago). But pretax operating profit margins sank to 7 percent, from an average of 8.9 percent for the previous three quarters of the year. Meanwhile, total client assets declined by $2 billion to $617 billion, but client assets in fee-based accounts increased by $3 billion, or 2 percent, to a record $173 billion.

Morgan Stanley brokers have lagged their peers for some time in terms of productivity—by comparison Smith Barney had pretax margins of 21.2 percent for the first three quarters of 2005, and Merrill Lynch had pretax margins of 19.8 percent, according to Merrill Lynch research. Morgan reps have fewer wealthy clients and less fee-based business compared to their rivals, which dampens profitability. That disparity is something that new CEO John Mack, who arrived in June after former CEO Purcell was forced out, is working to improve. In the past six months, he replaced longtime head of the retail brokerage John Schaefer with former head of Merrill Lynch’s retail brokerage James Gorman (though Gorman won’t arrive until February); cut about 1,000 lower-producing brokers; and offered incentive bonuses to brokers and their sales assistants for next year.

Still, the firm continues to lose talent and is paying out the nose to bring on new top producers. In fact, compensation and benefits expenses for all of Morgan Stanley rose 41 percent in the quarter. For more about departing brokers, take a look at "Morgan Brokers Still Heading for Exits," which appeared in the December issue of Registered Rep.

Meanwhile, three Morgan Stanley directors stepped down on Wednesday. Lead director Miles Marsh, as well as Edward Brennan and John Madigan resigned. Since June 2005, the board of directors has seen the resignation of nine directors (three management directors and six independent directors, including those whose resignations were announced today) and the election of five new ones. With the resignations of Brennan, Madigan and Marsh, the board will have nine directors, including seven independents.

Edward Brennan, a former president and CEO of Sears and a director since 1993, stepped down because he will be over the board’s age limit of 72. But Marsh and Madigan may have been worried about proxy battles this spring. Both have long tenures on the board: nine years and five years, respectively.

“Some of the board members that have been on watch for the company as performance has lagged will be in for proxy fights if they stick around,” said Sandler O’Neill analyst Jeffery Harte back in September, when director Michael Miles resigned his post.

Despite a number of changes made to improve corporate governance at Morgan Stanley early this year, the board has come in for plenty of heat. In the fall, shareholders filed lawsuits against the board over golden parachutes offered to Purcell, former co-president Steve Crawford and other executives. Perhaps even more important, the board stood by Purcell when a group of eight dissident shareholders called for his head over lagging profits and depressed share prices, only to relent a few months later after a number of key executives fled over the scuffle.