Morgan Stanley posted stronger-than-expected quarterly revenue and retail brokerage profit jumped, validating its strategy of bolstering businesses that are less threatened by tougher regulation following the financial crisis.

While fourth-quarter profit fell short of forecasts, investors focused on the bank's stronger results in areas such as asset management. Morgan Stanley shares rose 4.6 percent.

In 2009, after the financial crisis brought the bank to the brink of failure, Morgan Stanley began reducing its reliance on trading and risk-taking for profit.

It began concentrating instead on areas such wealth management, where revenue is more stable. As part of that move, it bought a controlling stake in Citigroup's retail brokerage business, now a joint venture known as Morgan Stanley Smith Barney.

Those moves seem to be paying off for Chief Executive James Gorman, who was originally hired by Morgan Stanley to oversee the bank's retail brokerage business.

Morgan Stanley Smith Barney generated record profit during the quarter and was responsible for about 20 percent of the bank's profit.

There were some good signs in these results and, if the retail investor is more active this year, it could really help Morgan Stanley, said Anton Schutz, president of asset manager Mendon Capital, which owns Morgan Stanley shares.

Asset management, a business that was long a weak performer, has turned around under Greg Fleming, who joined Morgan Stanley in February 2010 and is now set to oversee retail brokerage, too. Asset management's revenue rose 68 percent from a year earlier and the business generated about 20 percent of the bank's income.

Morgan Stanley's diversification stands in contrast to rival Goldman Sachs Group Inc, which generated about 82 percent of its fourth-quarter revenue from investment banking. Goldman shares fell 4.7 percent after the bank posted disappointing quarterly results on Wednesday.

(Morgan Stanley is) starting to look a little clever with these more stable revenue businesses, said Adrian Cronje, chief investment officer at Atlanta-based Balentine, a wealth management firm.

EARNINGS MISS

Still, excluding $668 million of pretax gains from the sale of its investment in China International Capital Corp, Morgan Stanley's earnings fell short of analyst expectations.

The second-largest U.S. investment bank said shareholder profit was $600 million, or 41 cents a share, up from $376 million, or 29 cents a share, a year earlier.

Adjusted earnings were 26 cents a share, below analysts' average forecast of 35 cents, according to Thomson Reuters I/B/E/S.

Investors looked past profits, though, and focused on Morgan Stanley's potentially better positioning for a world of tougher financial regulation. Morgan Stanley's shares were up $1.27 at $29.02 at the close on Thursday.

New laws in the United States and abroad threaten to reduce the profitability of many traditional investment banking businesses. Much derivatives trading, for example, is expected to move to exchanges, which will reduce profit for banks that used to match up buyers and sellers themselves.

Under the Dodd Frank U.S. financial reform bill, banks will not be able to do as much trading for their own accounts, which could cut into profits. Morgan Stanley said last week it will spin off its proprietary trading business, which trades the firm's money, in 2012.

In October, Morgan Stanley said it planned to sell a majority stake in FrontPoint Partners, a hedge fund manager, to its portfolio managers. That deal was supposed to close in the fourth quarter, but is now set to close in the first quarter, Morgan Stanley said.

A key manager at FrontPoint, Steve Eisman, was reported to be mulling leaving the company. He told Reuters he wants more control over his fund.

Even if banks will do less trading for themselves, executives have expressed some optimism about the outlook for trading on behalf of customers.

Clearly, there have been some structural changes in certain parts of the markets. The real question is, are they permanent, are they temporary, David Viniar, chief financial officer at Goldman Sachs, said during a Wednesday conference call. I don't happen to believe most things are permanent.

But some investors have questioned whether trading volumes could be depressed for some time.

Morgan Stanley posted fourth-quarter revenue of $7.81 billion, topping the average Wall Street forecast of $7.35 billion.

Even with Thursday's gains, the company's shares trade at about 0.9 times their book value, or their net accounting value. Goldman Sachs shares, in contrast, trade at about 1.3 times their book value. Some investors believe Morgan Stanley's valuation has room to move closer to Goldman's.

TRADING

The bank suffered from the same trading malaise that hit JPMorgan, Goldman Sachs and Citigroup Inc. Morgan Stanley's overall trading revenue fell 38 percent and it lost money in fixed-income trading.

Morgan Stanley hopes trading volumes will improve as the global economy improves and hopes it can boost market share, she said.

On a conference call, CEO Gorman said the bank has more work to do in fixed income. Morgan Stanley hired hundreds of traders over the past year as part of a multiyear effort to boost its bond trading business, which is small relative to rivals.

The bank earlier this month said Jack DiMaio, global head of interest-rate, currency and commodity trading, was leaving, and that chief risk officer Kenneth deRegt was becoming global head of fixed income sales and trading.

Morgan Stanley Smith Barney generated income for Morgan Stanley of $166 million in the fourth quarter, up from $29 million a year earlier. Morgan Stanley holds a 51 percent stake in the joint venture.

For the firm as a whole, about 51 percent of revenue was paid out to employees as compensation in 2010, down from 62 percent a year earlier.

Morgan Stanley said it is deferring more of employees' pay.

(Additional reporting by Ryan Vlastelica in New York and Joe Rauch in Charlotte, N.C.; editing by John Wallace and Andre Grenon)