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Morgan Stanley wealth management profits surge despite flat headcount

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Pretax profits at Morgan Stanley’s Wealth Management unit climbed 24% to $973 million during what CEO James Gorman called “one of the strongest quarters in recent history.”

The division reported records Wednesday morning in net income before taxes, revenue ($4.06 billion) and client assets ($2.19 trillion) amid a pretax margin of 24% in the first quarter of the year. Wealth Management comprised roughly 42% of the firm’s revenue over the period.

The earnings, which far outpaced the 4% growth reported Tuesday by Bank of America Merrill Lynch’s wealth management division, came despite a net loss of 111 advisers year-over-year. The firm grew by only 14 brokers from the prior quarter to 15,777, still the largest headcount of any wirehouse.

The flat recruiting figures contrasted with record annual production level per adviser of $1.03 million. Fee-based client assets grew 16% from the first quarter of 2016 and 6% from the fourth quarter to a record $927 billion.

New fee-based assets hit $18.8 billion, triple the figure of a year ago and the highest total since the fourth quarter of 2014, Morgan Stanley CFO Jonathan Pruzan noted on the company’s earnings call.

“All our businesses performed well in improved market conditions,” Gorman said in a statement. “We are confident in our business model and the opportunities ahead, while recognizing that the environment remains uncertain.”

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The delay and possible repeal of the Department of Labor’s fiduciary rule mark one area of uncertainty discussed in the earnings call Wednesday morning. Morgan Stanley has indicated that it will proceed with lowering client fees and broker commissions in response to the rule, among other changes.

“We’re prepared, if it does go into effect, to be compliant,” Pruzan said in response to an analyst’s question about the rule, noting the growth in fee-based assets. “All of that momentum is playing well in our system, in our network.”

He admitted, though, that the rule has “probably” hurt the firm’s recruiting.

Asked for clarification, a company spokesman says in an email that guidance from the DoL last year suggesting that recruiting deals create conflicts of interest led to restructured offers and a subsequent slowdown across the industry.

Indeed, Merrill Lynch disclosed it lost 145 advisers over the first quarter, and Wells Fargo’s headcount dropped by nearly 400 brokers. Morgan Stanley recently lost brokers to Ameriprise, Raymond James and its chief rival, Merrill Lynch. A $1 billion team also left for J.P. Morgan Securities.

Yet the firm’s headcount did increase slightly in the first quarter. Its adviser productivity grew 2% over the previous quarter and 11% from the prior year, which the spokesman notes is "way above the comparable changes in the size of the force."

The company has also allowed its advisers more flexibility to offer commission-based retirement accounts, which Merrill had pledged to eliminate entirely under the rule. Morgan’s approach played a role in its recent poaching of three separate Merrill teams.

Wealth Management accounted for the second-highest revenue and profits of Morgan’s three units. The company reported $1.9 billion in profits overall and $1.00 in earnings per share, compared to $1.1 billion and $0.55 a year ago. Its stock value grew nearly 3% to $42.38 a share by Wednesday afternoon.

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