By Jed Horowitz
NEW YORK, July 17 (Reuters) - Morgan Stanley posted wealth management results for the second quarter just a hair's breadth short of a key profitability target it set for the end of 2015, but bank executives remained concerned about the high costs of recruiting brokers.
The bank posted pretax profit of $767 million in its wealth division in the second quarter, 38.6 percent of its total profit and the highest since Morgan Stanley began a retail brokerage joint venture with Smith Barney five years ago.
The profit represented 21 percent of net revenue in the wealth division, a margin that has risen from the single digits and was close to the bank's target of raising pretax profit margin to between 22 percent and 25 percent by the end of next year.
Morgan Stanley Chief Executive Officer James Gorman said he remained unhappy with the expensive recruiting wars that the company and its three large rivals were waging to lure top brokers from each other.
"Long term, strategically, in an oligopoly you'd expect less movement of financial advisers between firms," he said, referring to rivals Merrill Lynch Wealth Management, Wells Fargo Advisors and UBS Wealth Management Americas . "That doesn't translate yet, but we think it will."
Gorman raised eyebrows earlier this year by saying compensation costs at Morgan Stanley Wealth should fall to 55 percent of revenue from 60 percent. People inside and outside the firm speculated he would be the first executive to curtail sky-high signing bonuses or make major changes in the way brokers are paid.
Chief Financial Officer Ruth Porat said the quickest way to slow down pay growth relative to revenue growth was for brokers sell more mortgages and loan products. There is ample room to grow in lending because few wealthy people know Morgan Stanley is a bank.
What's more, she said, brokers receive lower pay for selling loans than they do for selling traditional products such as stocks, bonds, mutual funds and managed investment accounts.
Aside from compensation, other costs fell 9 percent to $762 million in the quarter versus a year earlier because Morgan Stanley is no longer spending millions to combine operations with those of Smith Barney. "We completed the integration, and now we're really benefiting from the operating leverage," Porat told Reuters.
TOTAL CLIENT ASSETS SOAR
Morgan Stanley on Thursday reported that total second-quarter income more than doubled, helped by rising revenue in its retail brokerage business.
Buying Smith Barney also has made Morgan Stanley the industry leader in selling packages of mutual funds and other "managed account" products that charge fees instead of commissions, Porat said. Asset management-related fees climbed 9 percent to $2.1 billion from $1.9 billion a year earlier, while commissions fell 10 percent to $511 million.
Morgan Stanley, which began its joint venture with the Citigroup-owned Smith Barney in 2009, purchased the remaining stake that Citi held last year.
Total client assets soared just above $2 trillion at June 30, a record number cited on Wednesday by Bank of America Corp's Merrill Lynch Global Wealth Management division. Both firms attributed the rise to market appreciation and brokers' focus on gathering assets from wealthy people.
Morgan Stanley's 16,316 financial advisers collected $12.5 billion in fee-based assets from clients in the second quarter, up 25 percent from a year ago but down 34 percent from the first quarter.
(Additional reporting by Lauren Tara LaCapra; Editing by Dan Wilchins and Jeffrey Benkoe)