* Pretax profit margin 13 pct excluding one-time costs
* Higher stake in brokerage expected to drive revenue
* Adviser headcount shrinks, productivity up
By Ashley Lau
Oct 18 (Reuters) - Morgan Stanley's wealth management business posted a stronger profit margin in the third quarter, excluding one-time costs from brokerage integration and raising its stake in a unit owned jointly with Citigroup.
The adjusted pretax profit margin for the brokerage rose to 13 percent from 11 percent a year earlier, edging closer to the company's "mid-teen" target, which Morgan Stanley said it expects to reach by mid-2013.
The bank finished its three-year integration of its wealth unit and Citi's Smith Barney on July 8, bringing the two units onto a fully merged technology platform. Also, Morgan Stanley purchased an additional 14 percent of Morgan Stanley Smith Barney in September, increasing its stake to 65 percent. It plans to eventually buy the rest.
"Results of cost initiatives in Global Wealth Management are increasingly visible now that we are on one platform," Chief Financial Officer Ruth Porat said on an earnings conference call Thursday.
Porat said increased ownership of the brokerage will generate more return on "deadweight capital" for the business, driving revenue expansion.
Revenue for the wealth business rose 3 percent to $3.3 billion in the third quarter, while total client assets increased 14 percent to $1.77 trillion as markets improved.
Brokerage profit, however, dropped 32 percent to $151 million.
The unit incurred one-time costs of $193 million from the integration and stake purchase in the third quarter. About $17 million of those expenses were compensation-related costs associated with the integration of the wealth unit.
Broker departures hit Morgan Stanley's adviser force, which shrank by 105 advisers from the end of the second quarter to 16,829 advisers at the end of the third quarter. Headcount was down by 832 from a year earlier.
One veteran adviser who left in the third quarter managed about $2 billion in client assets, according to sources familiar with the move. New York-based Jonathan Madrigano left the firm to join JPMorgan Securities in late September.
The wealth unit in the third quarter lost at least 43 veteran advisers who managed more than $8.2 billion in client assets at the firm, according to Reuters calculations. Reuters tracks the movement of individual advisers and teams that manage $100 million or more in client assets, which typically translates to $1 million or more in annual revenue production.
For the year, at least 192 veteran advisers who managed about $25.5 billion in client assets have left Morgan Stanley Wealth Management, based on moves tracked.
Widespread frustration with the firm's newly merged technology platform was one reason departing brokers interviewed by Reuters said they decided to leave.
Still, Porat said attrition of top advisers was down in the third quarter.
Average productivity for advisers climbed 9 percent to annual revenue of $790,000 per adviser at the end of the quarter.