Merrill Advisors Shine on Loan Growth But New Asset ‘Flows’ Stall
(Adds explanation for new-asset decline in third paragraph and new-household data in sixth paragraph.)
Merrill Lynch’s brokers sold a slew of mortgages and structured loans to their wealthy customers in the second quarter, but their success in hitting the company’s overall asset growth goals was mixed, parent company Bank of America indicated on Monday in its quarterly earnings report.
New assets that Merrill’s almost 15,000 brokers collected from existing and new customers into advisory accounts were more than halved in the April-June period to $10.8 billion from $24.2 billion in this year’s first quarter and from $27.5 billion in the second quarter of 2018. Merrill and most of its competitors have for years guided brokers and customers to asset-based advisory accounts that provide more stable fees than traditional transaction-based commission accounts.
Company officials publicly characterized the new-asset “flows” as still “solid,” but people close to Merrill conceded that three factors conspired to weaken advisory account growth. The demise of the Department of Labor’s fiduciary rule has reduced the significant pressure that Merrill was imposing to move customers out of commission accounts, its withdrawal from “competitive recruiting” has diluted the introduction of new customers to the firm and several states have raised taxes on the very wealthy, giving them less investment money to play with, a person familiar with the numbers said.
On the other side of the balance sheet, average loan balances from customers of Merrill Wealth, and from the bank’s smaller U.S. Trust private bank unit, grew by 6.6%, or $10 billion, from the year-earlier quarter (and were up 1%, or $1.7 billion, from this year’s first quarter). On a conference call with analysts, Bank of America executives credited much of the liability growth to structured loans and mortgages.
Merrill Lynch Wealth head Andy Sieg has created numerous incentive programs and a carrot-and-stick compensation plan to reverse years of dwindling asset and household growth numbers at a time when the firm has reduced hiring.
Bank of America did not break out new accounts in its earnings report, but the person familiar with the numbers said they are up to 4.6 households per average advisor, annualized, in the first half of 2018, from 2.5 in the comparable 2017 period. On a net basis, including customers who leave, new accounts have grown to 2.6, annualized, from 0.4 in last year’s first half. The average new-account size has inched down to about $1.3 million from $1.4 million, historically, the person said.
Client balances overall at Merrill Wealth overall reached a record $2.3 trillion as of June 30, 5% higher than a year earlier. Bank of America attributed the rise to higher market values as well as the new-asset flows.
Merrill’s brokerage force of 14,820 advisors has remained flat, with nine fewer brokers than at the end of the first quarter and nine more than it reported on June 30, 2017. The company retrenched from hiring experienced brokers a year ago, but has bulked up its sales force by channeling more people from its almost four-year training program into its “experienced broker” ranks than in the past, the company said.
In a possible reflection of the less-experienced sales force, average productivity per advisor fell at the end of the second quarter to $1.02 million of revenue, annualized, from $1.04 million 12 months earlier.
Retention of brokers remains “near historic lows,” Merrill Chief Financial Officer Paul Donofrio said on a conference call, a modification of the firm’s first-quarter 2018 announcement that broker attrition was at a record low of about 2%. Donofrio said brokers have “reacted constructively” to the 2018 compensation program that rewards growth and punishes stasis.
Bank of America, the second-largest U.S. bank, overall reported a strong second quarter, with a 33% jump in profit that beat the consensus expectation of Wall Street analysts.
Net income at the combined Merrill and U.S. Trust-comprised global wealth & investment management division increased by 20% from last year’s second quarter to $968 million but declined from the first quarter’s record $1.04 billion of profit.
Total revenue grew by $14 million year-over-year, or 0.3%, to $4.7 billion, Bank of America said. The division derived 85% of its revenue from the more predictable advisory fees and net interest income, up from 82% one year ago.
Noninterest expense in the global wealth and investment management division rose by $7 million from a year ago, driven by higher revenue-related compensation incentives, but was down by $29 million from this year’s first quarter.
The division’s pretax margin of 28% matched the year-earlier quarterly metric, off from 29% in this year’s first quarter.