Merrill Grows Revenue But New Client Assets Languish
In a tangible sign of Merrill Lynch Wealth head Andy Sieg’s concerns about slow growth of customer accounts and assets, new money flowing into accounts at Merrill and the U.S. Trust division of Bank of America recorded its worst quarter of the year in the last three months of 2017, the bank said on Wednesday.
Net client flows of $18.2 billion in the October-December periods compared with an average of $25.9 billion in the first three quarters of 2017, and were down almost 4%, or $706 million, from the fourth quarter of 2016.
Total client balances within the bank’s global wealth and investment management division rose 3% during the quarter and 10% from the end of 2016 to $2.3 trillion, largely on the back of a roaring stock market as the S&P 500 rose 6.1% in the quarter and 18.2% for the year. Market appreciation and activity from existing clients accounted for 82% of the growth in retail assets under management, Bank of America said.
Sieg has added compensation rewards and penalties in 2018 to encourage Merrill’s almost 15,000 brokers to improve their average annual growth rate of less than one new household account.
Merrill and other large firms have in the past relied on attracting experienced brokers and their clients as a key growth strategy, but it and rivals have substantially cut their recruiting budgets. That puts a premium on asset growth from existing brokers.
Morgan Stanley, UBS Financial Services and Citigroup also have recently dropped out of the Protocol for Broker Recruiting, making it more difficult for their brokers to leave for new firms. Merrill has not followed them, and Bank of America Chief Executive Brian Moynihan equivocated when asked on a conference call if remaining in the pact has made his primary wealth unit more vulnerable to losing brokers.
“We continue to monitor the market and we’ll figure out what to do, but we haven’t changed our position,” he told analysts on Wednesday. He described Merrill’s “experience” regarding broker attrition to date as “relatively modest.”
Merrill ended 2017 with 14,953 brokers, flat with the end of the third quarter and up a net 333, or 2%, from the end of 2016.
“Most of the growth is coming from [our] advisor training program,” Moynihan said on the earnings call Wednesday morning. “We have changed our recruiting…from the traditional way.”
The average productivity of brokers in the fourth quarter was $994,000, flat with the the third quarter, and up 1% to $1.31 million excluding those who are in the firm’s three-year training program.
Moynihan on the call recognized Sieg as well as new U.S. Trust President Katy Knox and divisional head Terry Laughlin “for doing a great job,” but said he expects them to work to increase profit margins from 26% in the just-ended quarter to the bank’s goal of 30%.
The executives will accomplish that over the next few years by driving “some of the digitization techniques” of the bank’s other businesses to platforms and processes for wealth management advisors and customers, Moynihan said. He also cited the referral of “lower affluent” customers to the bank’s growing discount brokerage unit Merrill Edge as a “more fundamental reset” to grow margins.
Merrill Lynch does not pay its brokers for servicing households who keep less than $250,000 in their accounts, and this year is requiring to make at least two customer referrals to other parts of Bank of America to qualify for certain bonuses and “recognition” clubs.
Net income as a whole in the bank’s wealth businesses grew 17% from the fourth quarter of 2016 to $742 million, while revenue was up 7% to $4.7 billion. The bank attributed the rise in part to continued growth in loans. Structured lending for wealthy clients and mortgages, in particular, drove average loan balances up $11 billion during the fourth quarter, or 7% from the year-earlier quarter, the bank said.
Brokers’ continuing efforts to shift customer retirement accounts to fee-based rather than transactional models, as required by Merrill, helped drive more assets to advisory accounts that brokerage firms favor because they are more stable than commission accounts. At the end of the year, 39.2% of the wealth division’s client balances were in advisory accounts and 40.9% in brokerage accounts.
Wells Fargo reported last week that 32% of its wealth management customers’ assets were in advisory accounts. Morgan Stanley, which will report its fourth-quarter results on Thursday, said 43% of its wealth customers’ assets were in advisory accounts.
For all of 2017, Bank of America’s wealth and investment management division fueled 16.9% of the company’s net income, the smallest of its four business sectors. Consumer banking’s $8.2 billion of net income was the largest contributor, followed by investment banking and markets (or trading).
The wealth unit’s total revenue of $18.6 billion in the fourth quarter exceeded the $16.0 billion generated by a dismal global markets quarter for the bank’s global markets, or trading unit.