From the September 2010 issue of Research Magazine • Subscribe!

September 1, 2010

Morgan Stanley Still Dominates in FA Count; Merrill and UBS Lead in Fees, Assets per Rep

The number of Morgan Stanley financial advisors -- including those involved in the joint venture with Smith Barney -- fell by about 50 to 18,087 during the quarter from the previous period. It declined by 2 percent from the second quarter of last year, when the firm had 18,444 FAs. But this figure still gave it the most advisors of the four wirehouse firms, topping Bank of America-Merrill Lynch by nearly 3,000 brokers.

Morgan Stanley said that its global wealth-management clients withdrew net $5.5 billion during the second quarter, including net outflows of $7.9 billion in the United States and net inflows in overseas offices of $2.4 billion. In the first quarter, the wealth-management operations had net inflows of $9.3 billion.

The company's total client assets of $1.5 trillion at the end of June were down 6 percent from the first quarter, but topped last year's $1.42 trillion. "It was a tough environment for retail investors, especially post-flash crash," said CFO Ruth Porat in a conference call with equity analysts in late July, adding that clients often withdraw funds during tax season.

Morgan Stanley CEO James Gorman stated several months ago that the company's goal is to boost client assets by $20 billion. In late July, Gorman said that Morgan Stanley is "not overly concerned" with the $5.5 billion outflow. This represents about $10 million in revenue per quarter or $40 million in yearly sales, he added.

Morgan Stanley has a 51-percent interest in the joint venture with former-Smith Barney owner Citigroup.

Advisor turnover in the top two performing quintiles (or the upper 40 percent in terms of fees and commissions) "is low," according to Porat. In terms of the movement of teams out of Morgan Stanley Smith Barney, she says there "isn't much."

In early July, MSSB attracted two teams from UBS in New York and Canton, Ohio, for instance, while in late May it lost a Charlotte, N.C.-based team to Baird.

Average annualized revenue per adviser also fell slightly, to $679,000 from $685,000 in the first quarter. It grew slightly over the same period last year, when average annualized sales per broker were $671,000.

Morgan Stanley said it closed 24 brokerage branches globally during the quarter as part of its Smith Barney venture. It now has 881 branches.

Morgan Stanley's wealth division posted a profit of $110 million, up 11 percent from the first quarter, on flat net revenue of $3.1 billion. The pretax profit margin fell to 7 percent from 9 percent during the first quarter. Again, Gorman had given an aggressive target for the 2010 performance in this area: 20 percent over the next year or so.

"We still expect to meet this target at the end of the integration," said Porat, though -- like other targets, such as $1.1 billion in cost savings -- it is being pushed out from 2010. "These are valid targets, but it's a question of timing," she explained.

In terms of the integration of Smith Barney, "The focus is on getting a series of steps done, which we are, and keeping the sales force stable, which it is, and giving the clients what they want," Morgan said during the analysts' call.

Companywide, Morgan Stanley reported income of $1.4 billion, or $0.80 per share, for the quarter ended June 30, compared with a loss of $138 million, or $1.36 per share, for the same period a year ago. Net revenues were $7.95 billion for the current quarter vs. $5.2 billion a year ago.

Including discontinued operations, the company reported EPS of $1.09 vs. a net loss of $1.10 last year. Discontinued operations included an after-tax gain of $514 million related to the sale of the retail asset management business, including Van Kampen Investments to Invesco. Analysts had expected earnings of $0.46 a share on sales of $7.93 billion.

Recently, Morgan Stanley Smith Barney appointed James Tracy as chief operating officer of distribution and development for wealth management in the U.S. and Douglas Ketterer as head of its private-wealth management unit in the U.S.

What's next for the largest wirehouse? "I think Morgan Stanley Smith Barney will focus on streamlining and upgrading its sales force now, so the number of financial advisors may fall," said Chip Roame, head of Tiburon Strategic Advisors in Northern California. "But, I'd expect those dropped to have fewer assets [than those that stay]. Thus, the firm will decline a bit in FAs and go up in assets."

MSSB is likely to focus on its top and mid-size advisors, adds Roame, which should boost both average production and total assets for the firm.

Merrill Lynch

BofA's wealth-management operations, led by Sallie Krawcheck, reported higher asset-management fees and brokerage income in the second quarter of 2010; these operations include Merrill Lynch and U.S. Trust. The wealth-management unit had $2.24 billion in fees and brokerage income in the most recent period, which topped $2.15 billion in the first quarter and $2 billion in the same year-ago period. Total client assets, however, fell about 9 percent from the first quarter, which the company says was a result of market volatility and the sale of Columbia Management in May.

Merrill Lynch had $1.7 billion in fees and brokerage income in the second quarter vs. $1.5 billion a year ago and $1.6 billion in the first quarter. BofA's wealth-management operations reported nearly $2 trillion in client assets, with some $1.4 trillion at Merrill Lynch. Merrill's assets declined $50 billion from the first quarter but grew $92 billion over the same year-ago period.

Merrill Lynch has 15,142 financial advisors vs. 15,005 in the previous quarter and 15,008 a year ago. On average, assets under management per broker are about $92.5 million.

The advisors' annual production average, based on fees and commissions in the first half of this year, is $836,000. Based on second-quarter results, annual production was about $853,000 vs. $823,000 a year ago.

In the second quarter, BofA introduced the online brokerage, Merrill Edge, which received 20,000 referrals resulting in 7,000 contacts, according to the company.

How does Merrill maintain such a high figure for its average production per rep? "It's always been that way, thanks to a focus on high net worth," explains Roame. Much of the advisor force of rival Morgan Stanley comes from the former Dean Witter brokerage firm, he points out, which aimed to serve Middle America.

Merrill, like UBS, has more high-net-worth clients than some other wirehouses, he adds, but Morgan Stanley could catch up. As for Merrill Edge, Roame remarks, while the jury's still out, it could end up like an earlier online-brokerage effort that frustrated many advisors.

In the second quarter, BofA's wealth-management division reported $4.3 billion in total revenue, $3.2 billion of which came from Merrill Lynch. This represents a nearly 4 percent increase for the unit compared to the first quarter and a 2.5 percent jump for Merrill Lynch. The total revenue includes the asset management fees and brokerage income, as well as interest income and other income.

Despite rising revenue, the unit had a 23 percent decline in net income from the first quarter, to $356 million, as non-interest and income tax expenses rose. Within the group, Merrill's net income was $316 million, a 12 percent fall from the first quarter.

The earnings figures show Merrill Lynch contributing about 11 percent of Bank of America's overall revenue and 10 percent of its net income, while the wealth-management unit makes up about 15 percent of Bank of America's total revenue and 11 percent of its net income.

Bank of America, the parent company of Merrill Lynch, reported profits of $3.1 billion, or $0.27 per share, on $29.2 billion of revenues in the second quarter of 2010 vs. profits of $3.2 billion, or $0.33 per share, on $32.8 billion of revenues in the same year-ago period.

Though the full impact of the recently passed financial reforms on Merrill remains unclear, equity analyst Richard Bove of Rochdale Securities does not anticipate that BofA will increase wealth-management fees to cover fees lost in its retail bank operations. "That would be a bad business practice," he explained.

BofA executives, Bove notes, didn't outline how the bank will respond to new financial-reform regulations that are expected to negatively impact retail banking and other fees -- though they certainly will do something. For instance, fees on retail-bank accounts and merchant services could go up, he says, but not fees in the capital-markets and wealth-management units.

Wells Fargo Advisors

As San Francisco-based Wells Fargo beat estimates on lower sales and profits, the bank saw the ranks of its advisor force move into the number three spot, despite rising year-over-year assets and sales in its wealth-management and brokerage businesses.

Assets managed by Wells Fargo Advisors increased 6 percent from a year earlier to $1.1 trillion, while the larger wealth, broker and retirement unit saw its total assets hit $1.2 trillion -- down from $1.3 trillion in the first quarter of 2010, but up from $1.1 trillion last year.

The number of its financial advisors stood at 15,102 in the second quarter, which puts it down about 4 percent from the previous year. The bank is also now behind both Morgan Stanley Smith Barney and Bank of America-Merrill Lynch in terms of its advisor force.

"This may be the natural outcome of the [historic] acquisitions of Prudential Securities, A.G. Edwards and Wachovia Securities," explained Roame." It may take some time to shake out." It's also possible that some Wells Fargo executives prefer the private-banking approach for high-net-worth clients and see upfront payouts to advisors as bad for business, he notes.

Earlier this year, David Carroll, a senior executive vice president in charge of wealth management, told Reuters that the unit would like to add 1,400 advisors in 2010 through hiring and training this year, including more in-bank advisors.

Wells Fargo's combined wealth, brokerage and retirement operations -- which include almost 5,100 licensed bankers -- earned $270 million in the second quarter, up 5 percent from a year earlier, as total revenue rose 2 percent to $2.87 billion, according to the company.

The bank also said that managed-account assets for its retail brokers grew $36 billion, or 22 percent.

On July 20, Wells Fargo said its fund unit completed the merging of the fund families of Wells Fargo & Company and the former Wachovia Corporation, now collectively known as Wells Fargo Advantage with some $224 billion in assets.

And in early August, St. Louis-based Wells Fargo Advisors said its independent brokerage arm is expanding and realigning its supervision team "in anticipation of continued growth." The number of advisors affiliating with Wells Fargo's independent broker-dealer has grown 24 percent over the past 18 months, according to the company.

This group now includes 886 financial advisors with $40 billion in client assets. (The broader Wells Fargo Advisor group includes 15,102 financial advisors and 5,094 licensed bankers with $1.1 trillion in assets under management.)

"We believe that our unprecedented growth [in the independent channel] is a direct result of the way we deliver full-service investment services through advisors who help meet the financial needs of their clients in their markets," said John Peluso, president of Wells Fargo Advisors Financial Network(or WFAFN), in a statement. "To sustain that rate of growth, it's important for us to deliver personal service to each practice while providing easy access to Wells Fargo's technology and comprehensive product platform," he said.

WFAFN's supervision team includes a director and three team leaders who manage the firm's network of regional supervisors.

In addition, the network's San Francisco-based parent company -- Wells Fargo -- has just released financial reports that estimate the impact of financial regulations enacted by Congress, including the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The bank says the reforms could cost the company $530 million in lost revenue over the second half of 2010.

In its August 9 10-Q form, the company said, "these laws and regulations may affect the manner in which we do business and the products and services that we provide ... and adversely affect our business operations or have other negative consequences."

Specifically, Regulation E, adopted in 2009, could reduce overdraft and other 2010 fee revenue by about $225 million in third quarter and $275 million in fourth quarter. Also, the company says the enactment of the Credit Card Accountability Responsibility and Disclosure Act of 2009 should affect its ability to change interest rates and assess certain fees on card accounts. It estimates implementation of the Card Act regulations could have a net impact of $30 million in third quarter 2010.

In 2009, Wells Fargo had total sales of $88.7 billion. Equity analysts estimate that this year's revenue should be $84.9 billion for the full year.

In July, equity analysts estimated that Morgan Stanley would lose up to 20 percent of its profits because of the financial reforms and that Bank of America might have a 16 percent drop in its profits. These effects are linked to the banning of certain activities, such as banks putting their own capital at risk in hedge funds, private equity firms and through proprietary trades.

UBS

UBS wealth-management operations in the Americas reported declining client assets and financial advisors during the second quarter, but positive inflows when interest and dividends are included. The brokerage unit, which does business in the United States and Canada, is led by former Merrill Lynch executive Bob McCann

Net new money outflows were 2.6 billion Swiss francs (about $2.5 billion), excluding interest and dividends, compared with 7.2 billion Swiss francs in the first quarter and 5.8 billion Swiss francs in the year-ago quarter.

UBS said it would have had net inflows of 1.7 billion Swiss francs -- about $1.6 billion -- this quarter for its U.S. advisors and net inflows of 2 billion Swiss francs -- about $1.9 billion -- for advisors in both the U.S. and Canada. "This marks the first quarter of net inflows on this basis since first quarter 2009," the company said in its full earnings report.

The number of advisors in the unit stands at 6,760 -- a 2 percent decline from the first quarter and a 15 percent decline from last year.

The company, though, insists it is battling attrition and improving client flows. "Financial advisor retention initiatives resulted in lower outflows related to financial advisor attrition, while net new money inflows from financial advisors employed with UBS for more than one year declined slightly from the prior quarter, but remained positive for the second consecutive quarter," UBS explained in a report.

Client assets are about 742 billion Swiss francs, down 3 percent from the first quarter but up 1 percent from a year earlier. The unit also posted a pre-tax loss of 67 million francs related to charges of 146 million francs related to layoffs and the closure of branches. Without these charges, UBS said this business would have posted a pre-tax profit of 79 million francs, more than double the 36 million francs it earned in the first quarter.

The bank's average revenue per advisor was $793,000, up one third from the same quarter last year. This puts UBS behind the $853,000 per advisor at Merrill Lynch but exceeds the production of Morgan Stanley advisors, which stands at $679,000. Each UBS Americas advisor has an average of $95 million in client assets, compared to $83 million at Morgan Stanley.

Roame says it is indeed a good sign that outflows from UBS Americas are slowing. Like at Merrill, he notes, average annualized fees and commissions at the unit have always been higher that at Morgan Stanley. And while it may continue to let go of lower-producing brokers, it also has "a long history of buying reps to grow" and could target higher-producing reps in the process, according to the industry consultant.
Swiss-based UBS AG reported an overall second-quarter a profit of 2 billion Swiss francs ($1.9 billion), topping analysts' forecasts of 1.34 billion francs, on July 27, when UBS Group CEO Oswald Gruebel told Reuters that he remains committed to the U.S. business.

Recently, UBS AG nominated Joseph Yam, founder and former head of the Hong Kong Monetary Authority, for election to the board of directors at the bank's next annual meeting on April 28, 2011.

John Sullivan, editor of Investment Advisor, contributed to this report.

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