Merrill Wealth Management Ekes Out Q2 Profit Thanks to Lower Bonuses
(Corrects first paragraph to show that average Merrill productivity in the second quarter fell 6.3% and ninth paragraph to show average production at $984,000.)
Broker productivity fell 6.3% at Merrill Lynch Wealth Management during the second quarter from a year earlier, but Bank of America’s global wealth and investment management division on Monday reported an 8% gain in profit for the same period as cost cuts far outpaced revenue declines.
Just over half of the cuts derived from expiration of retention packages that Merrill brokers received when Bank of America bought the brokerage giant in 2009. The maturation of the retention program is saving $400 million, or $100 million a quarter, this year over 2015, but bank executives said they have to ensure that expense discipline continues.
The big question is where the savings will come in light of continued low interest rates that is constraining revenue, Bank of America Chief Executive Brian Moynihan said on a conference call with analysts after the third-biggest bank reported better-than-expected overall quarterly results.
Merrill’s fee-based advisory and commission-based brokerage revenue both declined from the 2015 second quarter as customers’ appetite for investing, and their account balances, were curbed by “a lot of volatility in the marketplace,” BofA Chief Financial Officer Paul Donofrio said on the analyst call.
The quarterly results underscore the bank-owned broker-dealer’s resolve to have brokers sell more loans and deposit accounts to their wealthy customers. While second-quarter revenue in the bank’s global wealth division fell 2% to $4.5 billion, its net interest income generated primarily from bank offerings grew almost 6% from the year-earlier period to $1.4 billion.
Global wealth clients had average mortgage loan balances of $64 billion during the second quarter, up from $60 billion one year earlier, while securities-based loans pitched by brokers to their clients inched up to $43 billion from $42 billion. Average deposits from global wealth clients grew 6% to $255 billion.
Despite grousing from some brokers that they have become puppets of their bank-owned masters, the bank reins are tightening at Merrill and its competitors. Merrill Lynch’s 2016 compensation plan requires brokers to make one client referral per year to colleagues at the bank to avoid a 1% reduction in their payout grid. (The referral does not have to result in closing of a loan or other transaction.)
In another sign of internal pressure, Moynihan said on Monday’s conference call that self-directed client accounts within the company’s consumer banking division are flourishing. Client assets at the no-frills Merrill Edge unit grew $10 billion from the second quarter of 2015 to $132 billion, while Edge households jumped 10% to 1.6 million. In contrast, client balances at Merrill Lynch Wealth Management of $2 trillion were down $26 billion from the year-earlier quarter.
The average Merrill broker generated $984,000 of commissions and fees in the second quarter, down 6.3% from $1.05 million in the year-earlier quarter but flat with this year’s first quarter. Excluding brokers in the training program, productivity averaged $1.3 million, Merrill said.
Bank of America, to be sure, is not abandoning its traditional brokerage unit. Merrill grew its brokerage force to 14,416 as of June 30, 151 more advisors than a year earlier. The company would not say how much of the growth came from brokers graduating from its three-year training program and how many were recruited from other firms. Merrill executives have indicated that they are expanding training while only selectively hiring experienced brokers. (UBS Wealth Americas Chief Executive Tom Naratil said in June that the company is cutting recruiting 40% this year.)
Global wealth and investment management (GWIM) is the smallest of Bank of America’s four principal businesses. Its $722 million of quarterly net income contrasted with $1.7 billion in consumer banking, $1.5 billion in global banking (commercial, corporate and investment banking) and $1.1 billion in global markets (trading).