‘Luminous’ Advisors Who Bolted First Republic Keep 88% of Assets
First Republic Bank this week acknowledged the pain inflicted on its wealth management business by the departure of its flagship group of advisors who left in June to form two independent registered investment advisory firms.Jim Herbert, chairman and chief executive of the San Francisco-based bank, opened First Republic’s second-quarter earnings conference call on Tuesday by acknowledging the “disappointing” departure of the former brokers whose Luminous Capital it bought in 2012 for $125 million.
He and Chief Financial Officer Mike Roffler then spent a good deal of their question-and-answer session discussing why the loss of the $16 billion team who were originally Merrill Lynch brokers will not affect earnings, even though the bank expects to retain just about $2 billion of their assets.
Much of their response focused on the high compensation costs and profit split of the team that catapulted First Republic into the wealth management limelight.
“[Th]e earnings on the assets we retained equal about the earnings on the overall situation before,” Herbert said. “This was a higher comp situation associated with them….and that had to do with the nature of the acquisition as opposed to simply hiring a team.”
Luminous was led by advisors David Hou and Mark Sear, who set up Evoke Wealth, and by Robert J. Skinner and Alan Zafran, who have established IEQ Capital.
Roffler said the loss of some $14 billion of its wealth management assets will not have a material effect on its earnings. (The bank reported $137.6 billion of total wealth management assets as of June 30, including $64.9 billion of brokerage and investment assets.) But some analysts sounded perplexed.
“I know you said it [has] no ongoing EPS impact, which kind of implies a pretty high comp expense ratio tied to this team,” Evercore Capital’s Rahul Patil said.
The high cost of maintaining Luminous reflected its prominence as an entire business, not just a wealth management team, said Herbert, the founder of First Republic.
“It was the purchase of an RIA,” he said. “We’ve only done that a couple of times and we generally avoid it for cultural reasons. Witness…this event, unfortunately.”
First Republic has been aggressively recruiting wirehouse brokers to bolster its wealth management business, which contributes about 15% of its revenue. Signing packages that recruiters say can total 300% of a broker’s trailing-12-month revenue will continue to affect compensation expenses, Roffler said when Sandler O’Neill analyst Aaron Deer asked if the hiring line item will get lighter.
“I don’t think I’d go lower [estimating that cost],” the CFO said. “We have hired other teams, other relationship managers and we’re also supporting them.”
First Republic, which expects a final $4 billion of former Luminous client assets to leave this quarter, reported a 6.1% jump in second-quarter net profit on Tuesday to $222.6 million on revenue that rose 10.1% to $819.4 million. The results missed analysts’ consensus estimate of $1.26 a share by two cents because of higher-than-expected expenses, according to Zacks.
Total wealth management assets at the bank rose as of June 30 rose to $137.6 billion, almost 12% higher than one year earlier.
Among the advisors First Republic has lured this year were a Wells Fargo Advisors teams in New York and San Diego producing $5.5 million and $4.7 million respectively, and a UBS broker in Newport Beach, Cal. producing $2 million. First Republic in March also hired Michael Lee, a veteran manager with noted East Coast recruiting skills from J.P. Morgan Securities.
“We’re actually very happy with the growth of the wealth management and we’re very happy with the hiring of the teams, and generally, it’s working out very well,” Herbert said on the call.
As for the Luminous advisors, he indicated they were not meant to be part of a larger enterprise.
“They’re great people and we’re still working with them on the banking side, but they’re very independent people,” said Herbert, who sold First Republic to Merrill Lynch in 2007 for $1.8 billion and was part of a consortium that bought it back two years later. “They want to run their own shop. I would note they’re even going into two new firms.”