Morgan Stanley said today in its earnings report that it is making “continued progress” on its integration with Smith Barney, but declines in assets and headcount suggest it may be feeling the pain of client and advisor departures. Total retail net new assets in the Global Wealth Management Group were down $5.5 billion in the second quarter, with an inflow of $2.4 billion in international assets offset by sharply higher domestic outflows of $7.9 billion. The global rep census was 18,087, down just under 2 percent from the second quarter of 2009; annualized revenue per advisor was $679,000, up 1 percent from a year ago but down 1 percent sequentially.

The Morgan Stanley Smith Barney integration (whose financials are reported in the Global Wealth Management results) formally closed on May 31, 2009, so some revenue and income figures aren’t apples-to-apples comparisons yet. Global Wealth Management reported pre-tax income from continuing operations of $207 million on net revenues of $3.07 billion, up from a pre-tax loss a year earlier of $71 million on revenue of $1.92 billion. The revenue increase is partly the result of the closing of the Smith Barney merger, which is partly offset by weaker market conditions, the company said. Client assets of $1.5 trillion in the division were up 6 percent year over year but down 6 percent sequentially. Morgan Stanley owns 51 percent of the Morgan Stanley Smith Barney business.

Last quarter’s declines in net new assets soured preceding gains: an increase of $9.3 billion in the first quarter and an increase of $400 million in the year-earlier quarter. ON the earnings conference call, Chief Financial Officer Ruth Porat attributed last quarter’s asset drop in large part to nervous investors withdrawing funds following the May 6 “flash crash.” But departing reps may figure into those numbers, too; some high-profile advisors have left Morgan Stanley over the past year, including Rye, N.Y.-based Strata Group, a $500 million practice that said in February it was joining HighTower Advisors in Chicago (a second Morgan Stanley practice, Levin Group in California, also moved to HighTower.) “It’s more about who you lose, rather than how many,” says Sean Cunniff, research director in brokerage and wealth management services at TowerGroup. “If you lose 100 guys who are average, it’s not a big deal.”

Alois Pirker, research director at Aite Group, was struck by the nearly $8 billion asset outflow last quarter. “If (clients) stop believing in the market, they pull it into cash, they pull it into money markets, they pull it into something else, but not necessarily out of the firm,” he says. “It might be too early to say if it’s a trend. The next quarter is going to be an interesting one to watch. If it’s repeated, then it’s a serious problem.”

At Bank of America’s Merrill Lynch, which reported earnings Monday, active accounts were off just under 2 percent. “I’m a real believer that that flash crash shook people up,” Cunniff says. “It’s almost as if someone flipped a switch and investors said, ‘Hey, things are not what they seem.’ Everyone’s really conservative.”

The larger picture for Morgan Stanley is more upbeat. Companywide earnings actually exceeded market expectations, and its stock was up sharply today. It had net income from continuing operations of $1.46 billion on revenues of $7.95 billion, compared to a net loss from continuing operations of $265 million on revenues of $5.2 billion a year earlier.