Morgan Stanley strengthens while Goldman sputters by Stephen Gandel @FortuneMagazine October 18, 2013, 2:43 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons Morgan Stanley CEO James Gorman FORTUNE — James Gorman’s Morgan Stanley makeover is finally showing results. Despite a tough three months for Wall Street traders, Morgan Stanley’s profits and revenue, driven by growth in its wealth management division, beat expectations for the third quarter. The bank earned $906 million, up from a loss of just over $1 billion a year ago. The year-ago quarter included a heavy hit from an accounting charge related to the company’s debt that many on Wall Street ignore. Even excluding that charge and other one-time expenses, though, earnings at Morgan Stanley MS more than doubled to just over a $1 billion, up from $560 million. MORE: Morgan Stanley’s happy Facebook anniversary The results are particularly striking given how badly Morgan’s chief rival Goldman Sachs stumbled in the quarter. On Thursday, Goldman GS said its earnings were flat and its revenue had tumbled 20% from a year ago. The firm was hit by a huge drop in its bond, commodities, and currency trading unit, which has been the chief driver of profits for Goldman since the financial crisis. Morgan Stanley wasn’t able to completely sidestep the mayhem on Wall Street in the summer and early fall. Indications that the Federal Reserve would pull back on its bond buying caused interest rates to rise, and the currencies of emerging market nations such as Turkey to tumble. Markets quickly reversed when the Fed backed off that plan, which seemed to catch Wall Street by surprise yet again. Revenue in Morgan’s fixed income and commodities unit fell by 43% from a year ago, similar to the drop at Goldman. But the quarterly results also seemed to validate Gorman’s plan to push Morgan Stanley away from Wall Street’s more volatile businesses, and toward advising individual investors on how to invest their savings, which produces more consistent fees. Revenue at Morgan Stanley’s wealth management division, for instance, rose $250 million from a year ago despite the quarter’s ups and downs on Wall Street. Overall, Morgan Stanley’s revenue rose $2.6 billion in the third quarter from the same period a year ago. Goldman’s, on the other hand, fell $1.6 billion. MORE: Goldman Sachs still earns its money is soon-to-be-banned ways It has been a remarkable turnaround for Gorman in the past year and a half. The CEO seemed to be on the ropes following a string of disappointments for the firm, including a debt downgrade and the Facebook IPO fiasco, on which Morgan was the lead underwriter. The acquisition of Citi’s Smith Barney brokerage division was slow to pay off as individual investors took a while to come back to the market. Now Gorman’s strategy is paying off, and Goldman suddenly seems adrift. Morgan’s wealth management unit had a return on equity, a key statistic on Wall Street, of 13% in the quarter. That compares to an overall ROE at Goldman of 8%, well below that firm’s long stated goal of 20%. Morgan Stanley’s overall ROE is still less than Goldman’s at 6%. Another sign that Gorman’s effort to re-risk Morgan Stanley is working: Value-at-risk, the measurement of how much money the firm’s trading operations could potentially lose on a given day, fell in every category in the quarter. Still, the results could be overstating the success of Gorman’s strategy. At a time when the market is hitting all-time highs, it makes sense that Morgan Stanley’s wealth management unit would be doing well. If the market falters, it could lag again. Individuals are often the first ones out in a market sell-off, and the last ones back in. Also, Morgan Stanley has struggled to maintain its market share in debt trading in recent years. That was a virtue this quarter. But it won’t always be. And Morgan Stanley still faces the problem that it now has to compete for lucrative investment banking deals against much larger rivals JPMorgan Chase JPM and Bank of America BAC , which can offer clients financing at cheaper rates. Nonetheless, for now at least, none of those possible negatives seem to matter. Gorman’s strategy is finally getting respect from investors. The bank’s shares are up 53% so far this year to just under $30.