The New York-based bank, whose shares slipped nearly 1 percent, reported a quarterly net income of $413 million, or 29 cents a share, compared with a loss of $10.5 billion, or $11.35 a share, in the year-earlier quarter.
The results fell short of analysts expectations, who on average expected a profit of 36 cents a share, according to Thomson Reuters I/B/E/S.
Morgan Stanley's investment banking business improved. Its underwriting revenues were $950 million compared with $245 million a year earlier as the firm's mergers and acquisitions business was top-ranked.
Morgan Stanley paid $3.7 billion in compensation expenses in the fourth quarter, boosting its total for the year to $14.4 billion in 2009, or 62 percent or revenue.
The ratio was inflated by the addition of brokers stemming from the Morgan Stanley Smith Barney joint venture, and because of accounting charges related to the appreciation of the value of its debt.
Earlier this month, Morgan Stanley promoted James Gorman to chief executive officer. Gorman replaced John Mack, who retained his role as chairman.
Gorman installed his own leadership team last month, hiring Greg Fleming, a former Merrill Lynch president and chief operating officer, to run Morgan Stanley's investment management group, a business that has struggled.
Shares in Morgan Stanley were down 27 cents at $30.85 in premarket trading.
(Reporting by Steve Eder, editing by Gerald E. McCormick and Derek Caney)