From the September 2012 issue of Research Magazine • Subscribe!

August 23, 2012

Q2 ’12 Wealth Profits Top Year-Ago Results

Bank of America-Merrill Lynch reported profits of $2.5 billion for second-quarter 2012, or 19 cents a share, beating analysts’ estimates of 14 cents. A year ago, the bank showed a net loss of $8.8 billion, or 90 cents a share, largely due to mortgage-related losses.

Revenues were up 66%, to $21.97 billion, compared with a year ago. “In a challenging global economy, we still see opportunities to do more with our customers and clients,” said CEO Brian Moynihan in a statement.

The Global Wealth and Investment Management unit, which includes Merrill Lynch and Merrill Edge advisors, posted higher year-on-year profits, with reported Q2 net income of $543 million versus $513 million a year ago, up 5.5%. However, profits were lower than in Q1, when GWIM reported net income of $547 million.

The total number of financial advisors rose to 17,534 from 17,512 in the prior quarter and 16,433 a year ago. Average trailing 12-month production, or fees and commissions, in the quarter per advisor was $915,000, up from $905,000 in Q1 but down from $965,000 a year ago.

Morgan Stanley

Morgan Stanley reported a 50% drop in profits, which totaled $563 million, compared with results of $1.19 billion a year ago. Earnings per share came to 28 cents for income from continuing operations versus last year’s loss of 36 cents a share. The loss included a negative adjustment of about $1.7 billion, or $1.02 per diluted share, related to the conversion of preferred stock held by Mitsubishi UFJ Financial Group into common stock.

The wirehouse also reported net revenues of $7 billion for the quarter compared with $9.2 billion a year ago. “Although global economic uncertainty remains a headwind, we are proactively positioning the firm for success,” said Chairman and CEO James Gorman in a statement. “In Global Wealth Management, we increased our pre-tax margin to 12% in an environment marked by investor caution, and we integrated substantially all of our technology systems, which should bring additional value to our clients.”

The number of Morgan Stanley Smith Barney (MSSB) advisors in the Global Wealth Management Unit dropped 2% from last quarter and 6% from last year to 16,934, while total assets under management stood at $1.71 trillion, 2% lower from the previous quarter but 1% higher than a year ago. MSSB counted 17,193 advisors in the previous quarter and 17,987 advisors a year ago.

These global reps produced average trailing-12-month fees and commissions of $775,000, 2% higher than last year’s revenues of $762,000. They managed average client assets of $101 million, unchanged from last quarter but 7% higher than last year’s figure of $94,000.

Morgan Stanley’s Global Wealth Management Group, which includes the MSSB joint venture, reported net revenue of $3.3 billion vs. $3.4 billion in the prior quarter and a year ago. Pre-tax profits were $393 million, up from $387 million in Q1 and $317 million last year. Its pre-tax profit margin of 12% topped that of the prior quarter, 11%, and last year’s tally, 9%.

“The pretax profit margin, which is the number that analysts really look at in the Global Wealth Management unit, rose from 11% to 12% in the second quarter,” said Shannon Stemm, a finance sector analyst at Edward Jones, in an interview. “So despite the fact that the unit saw a revenue decline, they were able to manage expenses. They failed to achieve the mid-teens-and-above target that they’ve been after for a number of years. But now that the Smith Barney integration really is behind them, they should be able to make some headway on further improving the profitability in that segment. We would anticipate that the 12% margin does go up from here.”

Despite a year-over-year decline of 1,053 reps, company officials say they continue to attract new advisors to MSSB. Advisors who recently joined MSSB include Brent Henry, Dustin Colebank and Mike Hudson, who came to MSSB in Arkansas from Merrill Lynch with about $2.35 million in combined production and $230 million in prior assets.

According in industry experts and other sources, about two weeks after its released earnings, Morgan Stanley appears to be mulling the closure of some wealth-management complexes, trimming support staff and boosting production levels at some branches, though the firm declined to comment on news reports about these developments.

“What is surprising to me is that they have picked this time to cut staff, which risks hurting service levels by putting more decisions into the hands of fewer people,” said Danny Sarch of Leitner Sarch Consultants. “I question the timing of this, especially since the advisor population is already stressed because of technology challenges. They risk hurting the service level at the worst possible time.”

Morgan Stanley, which owns 51% of the MSSB joint venture, also is working to purchase an additional 14% of this business from Citigroup. The hotly disputed value of MSSB is being appraised by Perella Weinberg Partners.

Wells Fargo

Wells Fargo reported that its Q2 profits rose to about $4.6 billion from roughly $4.0 billion a year ago and $4.3 billion in Q1. Earnings stood at $0.82 per share, a penny higher than analysts’ expectations. Revenues were $21.3 billion, up from $20.4 billion last year but down from $21.6 billion in the prior quarter.

The Wells’ business segment covering wealth, brokerage and retirement, profits rose to $343 million, beating results of $337 million a year ago and $296 million in the prior quarter. Wealth management reported client assets of $197 billion, down $8 billion, or 4%, from a year ago.

The wealth, brokerage and retirement unit included 15,170 financial advisors as of June 30, an increase over the 15,134 financial advisors reported as of March 31. This figure includes 10,913 advisors in the traditional brokerage channel, lower than the 10,987 reported in the previous quarter.

UBS

UBS said its second-quarter net income fell to 425 million Swiss Francs, or 0.11 Swiss francs per share, from 1.02 billion Swiss francs, or 0.26 Swiss francs per share a year ago. This represents a decline to about $435.5 million from $1.04 billion, missing analysts’ expectations.

The firm’s investment bank had a pre-tax loss of 130 million Swiss francs (or $133 million) in the second quarter due to “challenging market conditions,” as well as a loss of 349 million Swiss francs (about $358 million) related to Facebook’s initial public offering.

Its Wealth Management-Americas unit, though, had a pre-tax profit of $211 million in the quarter ended June 30. This represents a 28% jump over last year’s results of $165 million and a 1% gain from the earlier period, when pre-tax income was $209 million. Total revenue for the unit was $1.59 billion. This is a 1% increase from the earlier period and a 5% improvement from the year-ago quarter.

“Our strong capital, liquidity and funding positions, as well as our transparency and consistency in communicating these strengths, clearly speak in favor of UBS and reassure our clients in an otherwise adverse environment,” said Group CEO Sergio Ermotti in a press release. “Clients recognize this and continue to entrust us with their assets.”

UBS’ operations in the Americas, led by Bob McCann, now include 7,021 financial advisors. That’s a jump of six FAs from the previous quarter and gain of 159 from the year-ago period.

Net new money in the second quarter was $3.8 billion, excluding dividends and interest, and $9 billion including them. This puts the inflows slightly below those of the first quarter but narrowly ahead of last year’s tally.

Per advisor, net new money was $541,000 in the quarter, excluding dividends and interest, and nearly $1.3 million per rep if these financial measures are included. Total invested assets were $797 billion, down from $807 billion in the first quarter but up from $774 billion in the year-ago period. This Q2 drop, UBS says, was “primarily due to a decline in market performance.”

Invested assets per advisor were $114 million, and annualized revenue per advisor of $905,000 represented a jump of 1% from $897,000 in the first quarter and 3% from last year.

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