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What's Keeping BD Execs Up at Night

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The quarterly reporting season often seems like little more than a parade of numbers and justifications for them. However, tucked away in these documents and discussions are details about the broker-dealers’ priorities, plans and strategies. Here are highlights from the earnings reports of the four biggest firms.

Morgan Stanley

Morgan Stanley Wealth Management had net revenue of $3.8 billion, down 2% from a year before. Its pre-tax earnings were $859 million, 3% weaker than in Q2 2015, while its after-tax earnings were $516 million — a drop of 8% from the prior-year quarter.

Its pre-tax profit margin was 23%, the same as Q2 2015 and up from 21% in the first quarter. Chairman and CEO James Gorman has said the unit is expected to produce a pre-tax margin of between 23% and 25% for full-year 2017.

The group has 15,909 advisors. Morgan Stanley advisors have average annual fees and commissions of $959,000. Average assets per rep stand at $128 million. Total client loan balances were $69 billion as of June 30. Fee-based assets hit $820 billion in Q2 2016, with asset flows of $12 billion.

On a conference call with equity analysts, CFO Jonathan Pruzan stressed that the firm has been “spending significant energy and dollars into investing in our digital platforms in wealth management,” and that the firm sees its digital effort as “far more than just robo.” Morgan Stanley hired Naureen Hassan (from Charles Schwab, and a member of this year’s IA 25) to lead this effort earlier this year.

“We think that the right business model and the winning hand here is a combination of advice and FAs with technology,” Pruzan explained, pointing to some “early progress” with mobile apps.

Morgan Stanley’s tech approach emphasizes data and analytics, so clients can be more informed; efficiencies around automation, so advisors and clients can spend more time together (“and not focus on paperwork”); and how clients interface with the firm, which can include video, mobile, text and other technology, the CFO said.

“We have 3.5 million households in our footprint, with many different investing needs, but also many different requirements and idiosyncratic wants and likes,” Pruzan said. “We have been building out a broader platform in terms of how we interface with our clients. […] We believe secular trends here are for advice with technology, and that’s the business that we’re building.”

A diverse client base requires a diverse tech platform, according to Gorman: “In our own book of business, only 2% […] of our client assets are in households with less than $100,000. We have nearly $800 billion in households with $10 million or more. So you [have] to look at the segmentation [and] the complexity of the client needs. [Access] to distinct technologies is a clear need, but it’s by no means the only need for folks who’ve got $10 million, $20 million [and] $50 million.”

As for the impact of the Department of Labor fiduciary rule, the firm sees itself as “well-positioned for that change,” Pruzan said. “We are making the investments in digital. We do believe […] our wealth clients want advice, and they will pay for that advice. But [identifying] the ultimate mix and shift of products that they want and that they need is going to be a function of time.”

BofA Merrill Lynch

Revenue from Bank of America Merrill Lynch, U.S. Trust and the bank’s consumer-banking unit was down 2.4% year over year to $4.46 billion, while net income improved 8% to $722 million. The unit’s net interest income rose slightly to $1.43 billion from $1.35 billion last year. The Merrill Lynch business, though, had a 4.2% drop in revenue to $3.63 billion in Q2 2016.

The average level of advisor productivity is $984,000, though BofA said the figure is $1.26 million for veteran FAs. The wealth unit has some 16,664 financial advisors; 2,248 of these reps are with the consumer-banking unit. It also says it has a total of 18,159 wealth advisors, 2,229 of whom are with U.S. Trust.

Total client assets are $2.42 trillion. Asset flows improved to $10.1 billion in Q2 2016 from $8.6 billion a year ago. In addition, the unit’s pre-tax margin was 26% in the most-recent period, up from 23% a year ago.

The wealth unit’s average loan balances rose about 7% from last year to $141.2 billion. “Today, 61% of our advisors (compared to 55% last quarter) have 50% or more of their client assets under a fee-based relationship,” the company said in a statement.

The firm is trying to lower advisor attrition at the lower production levels, which CEO Brian Moynihan explains is “mainly due to people not being able to kind of build a book of business. And we’re trying to fix that through the integrated business system with our consumer and preferred teams.”

Moynihan said during a call with analysts that the new DOL rule is consistent with the firm’s move to “a managed money, fee-based, [...] financial-planning-driven business.” He added, “Admittedly it’s a little tricky, because the actual rules only apply to the $200-odd billion of 401(k) and retirement assets we have. But it’s consistent with where we’re taking the business.”

Also in Q2, BofA’s self-directed trading and investments platform, Merrill Edge, saw its customer base grow by 10% from a year ago; it now has more than 1.6 million households using it and some $132 billion in assets, according to CFO Paul Donofrio.


UBS’ Wealth Management Americas unit had operating earnings of $1.9 billion in Q2 2016, down 1% from last year. Adjusted pre-tax profits for the unit, though, increased to $281 million — up 15% from the prior quarter and 22% from a year ago, reflecting high net interest income and lower operating expenses. (Profits excluding adjustments were $245 million versus $205 million in Q2 2015.)

Net new money inflows for the period were $2.4 billion versus net outflows of $0.7 billion in the same quarter last year. Invested assets for the unit were $1.08 trillion, up 3% from the prior quarter and 3% from a year earlier.

The group includes 7,116 financial advisors with invested assets per advisor of $151 million. Average fees and commissions per rep stand at $1.08 million.

The company recently announced compensation and other changes that emphasize “retaining our best advisors” and deemphasize “the aggressive recruiting practices prevalent in the industry,” UBS Group CEO Sergio Ermotti explained during an earnings call.

As for new product rollouts, a systemic-allocation portfolio, which adjusts its equity allocation “based on quantitative signals about the likelihood of a market downturn, [appeals] to clients with an interest in dynamic equity exposure,” according to CFO Kirt Gardner, who also spoke on the call.

An endowment-style offering lets clients include illiquid private markets (like private equity) and alternative investments in portfolios “that they would not be able to replicate on their own,” Gardner said. Once the wealth-management platform between the Americas and other parts of the world has been fully integrated, these products will be sold to clients in the U.S.

Other shifts described by the CFO include giving more power to branch managers and giving advisors mobile and other “cutting-edge” tools (via UBS’ alliance with fintech provider SigFig).

Wells Fargo

Wells Fargo’s Wealth and Investment Management unit, which includes Wells Fargo Advisors, had $3.92 billion of total revenue in the second quarter versus $3.98 billion a year ago. The bank says this decline was related to lower asset-based fees and brokerage transaction revenue. The unit’s net income was $584 million, down from $586 million in Q2 2015.

The unit breaks out its assets by segment: retail brokerage, wealth management, retirement and asset management. Client assets in the retail brokerage business improved 2% to $1.5 trillion, while advisory assets also grew 2% to $444 billion, “primarily driven by positive net flows,” according to the bank. It also had “strong loan growth,” with average balances up 20% from 2015, “largely due to continued growth in nonconforming mortgage loans and security-based lending.”

The wealth group’s assets were $224 billion as of June 1. Its average loan balances expanded 9% on higher mortgage and commercial loans, as well as security-based lending.

Well Fargo recently said Mary Mack, head of Wells Fargo Advisors, is replacing Carrie Tolstedt as head of community banking, which includes the retail branch network; Tolstedt will retire at year end. Brand Meyer, head of the group’s independent brokerage group, including First Clearing and Wells Fargo Financial Network (or FiNet), will replace Mack until a permanent leader of WFA is named.

“Mary is a 32-year veteran of the financial services industry and has a diverse mix of experiences including retail banking, which will serve her well as she takes the reign of this key business,” said Chairman and CEO John Stumpf during an earnings call. “This transition highlights our commitment to stable long-range succession planning and our belief that our team members are our most valuable resource.”


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