Earnings Forecast: Clouds Give Way to Sun

The past year's earnings troubles belie the brokerage industry's sunny prospects for 2005, according to the SIA's Frank Fernandez. SIA figures for 2004 show dreary pretax profits of $19.5 billion, a 19.1 percent drop in broker/dealer earnings from 2003. However, that cloud had a silver lining strong revenues that forms the basis of a better 2005, with improved profits and rising employment. We're

The past year's earnings troubles belie the brokerage industry's sunny prospects for 2005, according to the SIA's Frank Fernandez.

SIA figures for 2004 show dreary pretax profits of $19.5 billion, a 19.1 percent drop in broker/dealer earnings from 2003. However, that cloud had a silver lining — strong revenues — that forms the basis of a better 2005, with improved profits and rising employment.

“We're finally starting to see an encouraging story on the retail side,” says Fernandez. After 20 years of steady revenue declines, due in large part to the increased commoditization of the brokerage business, firms have started to turn things around. Better customer segmentation and improved fee-based solutions are two reasons for the improvement.

For advisors, the industry's recent troubles have translated into fewer jobs, but many firms are recruiting aggressively again. Smith Barney, UBS, Morgan Stanley and Merrill Lynch all showed a net gain of financial advisors for the year. Wachovia's broker staffing level is still below where it was this time last year, but the firm has begun hiring again, adding 53 advisors in the fourth quarter and ending a four-quarter negative employment streak. Merrill Lynch met its full-year goal of a 5 percent increase in headcount during the first two quarters.

Complementing the job growth, which Fernandez expected to continue at a 3.5 percent-to-4 percent clip this year, was broker-compensation growth, up 6 percent in 2004.

Fernandez expects the fourth-quarter rebound will continue; the SIA projects a 12.8 percent rise in profits in 2005.

At Smith Barney, net profits for 2004 rose 11 percent to $881 million. Net revenues for the year also rose 11 percent to $6.5 billion, and fee-based revenue accounted for 47 percent of the year's revenues. Total client assets at the firm reached $978 billion, a 7 percent year-over-year increase.

Merrill Lynch's global private client group profits rose 23 percent to $1.87 billion in 2004. The firm's revenue increased 11 percent to $9.8 billion, and assets in private client accounts grew 7 percent to $1.36 trillion.

At Wachovia, pretax profits from the retail brokerage were up 27 percent to $620 million in 2004. Total revenues were up 28 percent to $4.37 billion.

Morgan Stanley's individual investor group saw profits decrease 20 percent to $371 million in 2004. Net revenues increased 9 percent to $4.6 billion, and client assets increased 7 percent to $602 billion.

In the U.S. wealth management group at UBS, private client revenue declined roughly 1 percent from $4.1 billion to $4 billion in 2004. Profits also declined roughly 1 percent from $4.3 billion to $4.2 billion in 2004. Private client assets declined from $572 billion to $563 billion in 2004.

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