Merrill Commission-Account Assets Fall to Almost Half of Total
With an assist from Merrill Lynch brokers’ continuing shifting of customers to fee-based accounts, Bank of America said Friday that third-quarter profit in its global wealth and investment division grew 10.1% from a year earlier to $769 million.
Assets under management or advisement in fee-based managed accounts crossed the trillion-dollar mark to $1.04 trillion at the end of September, representing 48.3% of total client investment account balances of $2.15 trillion. Twelve months earlier, fee-based assets were just 42.6% of total investment account balances of $1.9 trillion.
Banks have been prodding advisors to shift customers to fee-based managed accounts that are statistically more profitable than traditional commission accounts, generate revenue regardless of whether clients trade and are less prone to compliance and litigation risks.
Commission-based accounts that most experienced Merrill Lynch brokers were trained to sell early in their careers held 51.7% of client money as of September 30, down from 57.4% one year earlier, Bank of America said.
Total quarterly revenue generated by Merrill’s brokers and its smaller force of private client advisors at U.S. Trust jumped 6% from the year-earlier period to $4.6 billion on the back of rising markets and higher interest rates. Noninterest income grew $139 million on the higher asset management fees while net interest income was up $102 million due to short-term rate hikes, the bank said.
The increases offset a 4% rise in noninterest expenses to $3.3 billion that the bank attributed to higher incentive pay to brokers and managers as their revenue-tied payouts increased.
Questioned on an earnings conference call about whether the bank can reduce compensation and other noninterest costs in the wealth businesses, Bank of America CEO Brian Moynihan was unapologetic. “Wealth management fee generation has more expense attached to [it],” he said.
Money spent on advisor incentives is “a great return on dollars” when set against the handsome 27% pretax profit margin generated by the wealth businesses, he added.
The wealth management business unit’s “efficiency ratio,” which measures expenses as a percent of revenue, was 73% in the third quarter compared with 51% and 43% at Bank of America’s much larger consumer and commercial banking divisions. (The ratio in its global markets division that often pays traders sky-high bonuses was 69% last quarter due to a 15% decline in sales and trading revenue.)
To be sure, Bank of America is scrutinizing costs in its wealth businesses. Merrill this summer announced a radical retrenchment from expensive recruiting of experienced brokers from other firms, and its once 16,000-strong Thundering Herd has contracted since Bank of America bought the broker-dealer during the financial crisis.
Merrill ended the third quarter with 14,954 brokers, up a net 286 from Sept. 30, 2016. The increase, half of which occurred in the third quarter, reflects graduates from the firm’s Practice Management Development training program as well as to outside hires, a spokesman said. He did not break out the division between the two sources of hiring.
The average productivity of Merrill’s experienced brokers (not counting those in training) fell to $1.3 million during the quarter from $1.35 million three months earlier but bested the $994,000 average of brokers in the third quarter of 2016.
Brokers’ referrals to and from other bank business lines increased 10% from the third quarter of 2016, possibly reflecting Merrill’s 2017 carrot-and-stick compensation strategy that reduces payout percentages to brokers who make fewer than two referrals.