From the December 2010 issue of Research Magazine • Subscribe!

December 1, 2010

Broker-Dealers Share Third-Quarter Results, Revenue Growth Plans

Morgan Stanley Chief Executive Officer James Gorman said in early November that the company plans to “move forward” and purchase the rest of the firm’s joint venture in Smith Barney, with the next option in a 14 percent stake coming up in May 2012, according to various news reports. Recently, there’d been reports that Morgan Stanley might consider delaying this schedule because of tougher global capital requirements for banks in 2013.

Morgan Stanley’s CEO also has highlighted the firm’s plans to put more capital into client-facing businesses rather than proprietary trading. In addition, the company continues to face possible losses from lawsuits related to structured products tied to mortgages and other securities.

In the third quarter of 2010, Morgan Stanley’s U.S.-based advisors produced net inflows of $2.4 billion, after experiencing client withdrawals of nearly $8 billion in assets during the second quarter. When non-U.S. advisors are included, the combined FA force had net inflows of $5 billion vs. outflows of $5.5 billion in the previous quarter and outflows of $11.9 billion in the third quarter of 2009.

“Morgan Stanley advisors’ results are impressive,” explained Mark Elzweig, an executive search consultant in New York, in a phone interview. “Keep in mind that the firm still has two parallel platforms [associated with its ’09 acquisition of Smith Barney], which have yet to be merged.”

Morgan Stanley financial advisors grew total client assets by 7 percent over last quarter and 5 percent over year-ago results to $1.6 trillion. Thus, the firm’s 18,100 FAs manage $88 million in assets on average. Combined client assets at Morgan Stanley now top Merrill Lynch’s $1.5 trillion; however they fall short of Bank of America’s total retail-advisor assets of $2.2 trillion (when U.S. Trust results are included). In addition, Merrill advisors manage $99 million in assets on average.

“Morgan Stanley has a lot of high-quality advisors, and they control significant pools of assets,” explained Elzweig. As for production, or fees and commissions per rep, Morgan Stanley FAs produced $686,000 in average annualized sales in the third quarter up from $679,000 in the second quarter and $662,000 last year.

This still puts Morgan Stanley Smith Barney advisors behind those at Merrill, who averaged $851,000 in annual fees and commissions in the third quarter. In terms of headcount, Morgan Stanley lost 22 advisors and ended the quarter at 18,119. It is down 41 FAs from last year. However, it is still ahead of Merrill’s 15,340 and Bank of America’s total advisor force of 16,790 financial advisors.

BofA-Merrill

Bank of America’s global wealth and investment management, or GWIM, unit reported total revenues of $4.07 billion, up from $3.87 billion in ’09 but down from $4.33 billion in the previous quarter. Net income was $313 million vs. $234 million last year and $356 million in the second quarter.

GWIM’s largest contributor, Merrill Lynch, reported that as of September 30, it included 15,340 financial advisors, up from 14,979 a year ago and 15,142 in the previous quarter. Including U.S. Trust wealth advisors, GWIM’s 16,790 financial advisors put it close to Morgan Stanley Smith Barney.

“Despite a challenging market, Merrill Lynch financial advisors have been strong contributors to the overall company’s revenue stream,” said Elzweig. “The advisor numbers verify the fact that Merrill Lynch has been a successful player in the wirehouse recruiting wars and has shown it can increase its headcount by hiring high-end professionals.”

In terms of annualized advisor revenues (or GDC), Merrill FAs averaged $851,000 in sales in the recent quarter vs. $853,000 in the second quarter and $837,000 a year ago. Based on the first nine months of 2010, the advisors have annualized sales of $841,000 vs. $825,000 in the same period of 2009.

Sales at Merrill Lynch hit $3.10 billion vs. $3.08 billion last year and $3.12 billion in the second quarter. The GWIM unit reported total revenues of $4.07 billion, up from $3.87 billion in ’09 but down from $4.33 billion in the previous quarter. Net income was $313 million vs. $234 million last year and $356 million in the second quarter.

Client assets for the GWIM unit totaled $2.17 trillion in the third quarter, down slightly from $2.23 trillion a year ago but up a bit from $2.09 trillion in the earlier quarter. Assets at Merrill Lynch came to $1.52 trillion vs. $1.44 trillion a year ago and $1.46 trillion in the second quarter.

GWIM asset flows, however, were in negative territory, with outflows of $1.5 billion in the third quarter, mainly resulting from outflows within non-Merrill Lynch segments (such as BofA Global Capital Management and BofA’s investment in BlackRock), the company says. Still, this is an improvement over outflows of $17.8 billion a year ago and $7.4 billion in the second quarter. 

Wells Fargo Advisors

Wells Fargo said its wealth, brokerage and retirement unit, which includes 15,000-plus financial advisors, had revenue of $2.91 billion in the latest quarter, up from $2.87 billion in the second quarter and $2.77 billion in the same year-ago period.

Net income for the unit was $256 million, down from $270 million in the previous quarter but more than double the $111 million reported in the third quarter of 2009. Assets improved 5 percent from last quarter for the unit to $1.27 trillion, and managed-account assets were up 10 percent, the company says.

In addition, Wells Fargo reported that core deposits in wealth, brokerage and retirement grew 17 percent over the first quarter of 2009, when the merger with Wachovia took place. Loan originations by financial advisors grew 33 percent year to date.

In terms of its headcount, released separately from its earnings report, Wells Fargo says it had 15,088 financial advisors as of the third quarter, down slightly from 15,102 in the second quarter.  This keeps it in the No. 3 slot, behind Morgan Stanley and Merrill Lynch.

In addition, the company now has 4,569 licensed bankers vs. 5,094 in the prior period. When these reps are included, Wells Fargo has 19,657 financial professionals, topping both Morgan Stanley and Bank of America-Merrill Lynch, which has 16,790 financial advisors (when U.S. Trust reps are included). However, BofA says it has a grand total of 19,761 financial professionals (advisors and others) in the organization ­— beating Wells Fargo by 104.

Overall assets at Wells Fargo have remained at $1.1 trillion. Including the bank professionals, this represents about $56 million in average assets under management per advisor. Excluding the bank reps, average AUM per broker is $73 million.

UBS

In the United States, UBS wealth-management advisors put a stop to client outflows —  a significant development after five quarters of outflows, experts say, though the wealth business in the Americas had a loss of about $47.6 million. “It is certainly good news that they were able to stem negative asset flows,” said Elzweig. “One helpful factor is that Bob McCann and the management team are inspiring confidence in the UBS sales force.”

In the Americas, net client asset inflows were about $305 million. However, in the United States, net new money inflows were “virtually zero compared with outflows of CHF 2.9 billion ($3 billion) [a year ago], due to improved flows from financial advisor recruiting and retention,” the company said in its third-quarter report.

In addition, net new money inflows from financial advisors employed with UBS for more than one year dropped slightly from the prior quarter, but remained positive for the third consecutive quarter, UBS says. Including interest and dividend income, wealth-management operations in the United States had net new money inflows of CHF 4.6 billion ($4.7 billion) in the third quarter.

Invested assets for wealth-management Americas totaled CHF 693 billion ($701 billion) as of September 30, down CHF 1 billion from last year. Total client assets, though, were CHF 743 billion ($752 billion), up slightly from the same year-ago period. For the first nine months of 2010, U.S. advisor net outflows were CHF 9.3 billion ($9.4 billion) vs. inflows of CHF 1.5 billion ($1.52 billion) in the same period of 2009.

The number of financial advisors with UBS-Americas is 6,783, down 503 from 7,286 a year ago. Still, the group added 23 advisors in the most recent quarter. “This is a bigger drop than some of the other wirehouses,” said Elzweig. “But it seems like UBS is keeping the bigger producers.”

UBS, he notes, is the only wirehouse broker-dealer that did not go through a major merger or acquisition in the past few years. As a result, its retention deal is not as hefty as what’s on the table at some competing firms.

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