A quick glance at first-quarter numbers released this morning from Legg Mason (NYSE:LM) might give the impression that the Baltimore-based money manager put together an exceptional quarter. Earnings surged 48% to $86.4 million, or $1.14, from $58.4 million the year before, on a 29% spike in revenues to $538.9 million. All three measures were among the best in the company's history, trailing only the sensational results posted last quarter. Unfortunately, analysts had set the bar even higher, and Legg Mason's $.09 shortfall has driven shares 6% lower in morning trading.

In the wake of scandals in the mutual fund industry, a changing regulatory climate, and the perception that proprietary fund companies present conflicts of interest for brokers, many Wall Street firms are looking to shed their asset management divisions. Last month, Merrill Lynch (NYSE:MER) discussed the possibility of selling portions of its half-trillion dollars in managed assets to Legg Mason, but the talks have since stalled.

Legg Mason, though, has been expanding the asset management segment of its business, which now accounts for more than half of all revenues and nearly three-fourths of earnings. Investment advisory fees in the first quarter jumped 53% to a record $368.8 million, and asset management pre-tax earnings rose 86% to top $100 million.

Meanwhile, traditional securities brokerage commissions inched up a scant 2% and represent a diminishing slice of the pie -- dropping from 20% to 16% of consolidated revenues. Investment banking was also weak, particularly in the municipal bond arena, as pre-tax earnings in the capital markets segment plunged 18% year over year and 39% sequentially to $10.3 million.

The future of full-service brokerage for firms such as Legg Mason, Morgan Stanley (NYSE:MWD), Bear Stearns (NYSE:BSC), and A.G. Edwards (NYSE:AGE) lies in a transition toward fee-based, managed money platforms such as wrap accounts and away from a transaction, commission-based business model. Not only is recurring fee-based business less cyclical and volatile, but it is generally looked upon less skeptically by investors who may question a broker's motives when heavy trading commissions begin to take a toll on returns.

Fortunately, Legg Mason's assets under management have climbed steadily the past decade, rising 37% over the past year to a record $295 billion, driven by both a rising market as well as healthy inflows. More important, assets in the more lucrative private wealth management division have grown nearly twice as fast (55%) as those in the more price-competitive institutional division (29%). Furthermore, equities, which typically rake in higher fees than fixed income, rose from 35% to 40% of assets. With excellent performance from the legendary Bill Miller and none of the bad press that has tainted other companies, these figures should continue to rise.

The Legg Mason Value Trust Fund (LMVTX) has returned 18.2% annually over the past 10 years, trouncing the S&P's 11.8%. Are you on the lookout for other market-beating funds? Take a free trial of Motley Fool Champion Funds.

Fool contributor Nathan Slaughter owns none of the companies mentioned.