Volatile markets and souring mortgages slashed earnings by nearly a third at Bank of America's wealth management businesses during the third quarter.

BofA's money management arm, which includes brokerage giant Merrill Lynch and private banking unit U.S. Trust, earned $347 million in the September quarter, down 31 percent from the second quarter, as potential mortgage losses prompted the bank to more than double the amount it set aside for possible future losses, to $162 million.

Revenue from these businesses fell 5.8 percent to $4.23 billion in net revenue, reflecting what many strategists have called the most difficult market environment since 2008.

The bank said customers withdrew a net $2.6 billion of liquidity assets such as money market funds during the quarter, but added $4.5 billion into stocks, bonds and other investments.

Those in-flows helped propel asset management fees to a record $1.56 billion during the quarter.

In its first earnings report after the abrupt departure of division president Sallie Krawcheck last month, BofA said Merrill Lynch third-quarter revenue slipped 1.9 percent from the second quarter, to $3.43 billion, while client balances fell 5.7 percent.

Total client balances -- brokerage assets, deposits and loans -- at Merrill fell 6.3 percent to $2.06 trillion. mass-market audience.

BROKER RANKS RISE

Merrill continued to make gains in recruiting. Its ranks of financial advisers rose by 475 to 16,722, second only to the roughly 17,800 advisers at Morgan Stanley Smith Barney.

Merrill's adviser count includes trainees. It also includes the roughly 1,000 Merrill Edge associates who work in BofA branches and call centers targeting a less affluent, mass market audience.

Per-adviser revenue production fell for a second straight quarter to an annualized $854,000, excluding Merrill Edge advisers. Merrill did not disclose the net addition or withdrawal of assets, a key measurement for brokerages.

Compared with the year-earlier period, global wealth and investment management earnings rose 29 percent, and revenue rose 9 percent, on higher asset-management fees, interest income and commissions.

U.S. stocks posted their worst quarter since 2008, hammered by Europe's spreading debt crisis, a downgrade of the United States' credit rating and a sluggish economy. The S&P 500 Index <.SPX> fell by more than 14 percent during the period.

(Reporting by Joseph A. Giannone; Editing by Jennifer Merritt and Walden Siew)

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