Wall Street’s retail brokerages managed to ride out a rocky couple of months in the equity market and still come out on top in the second quarter. Despite a downward slide on in the S&P 500 and Dow Jones Industrial Average in May and most of June, Morgan Stanley, Merrill Lynch, Smith Barney and Wachovia all recorded strong jumps in revenue versus the year-ago quarter in their retail brokerage arms. (UBS has not yet reported.) It looks like the firms’ continued efforts to migrate to fee-based business—away from transactions—and to push advisors and brokers upstream in search of wealthier clients—and more assets—is paying off.
Merrill Lynch far outranks the rest and fattened its lead over the other firms in the quarter, both in terms of the size and quality of its earnings, while embattled Morgan Stanley leapfrogged back into the race. Wachovia and Smith Barney, meanwhile, posted record earnings and record revenues, respectively. Wachovia's profit margins also improved, but Smith Barney's slipped.
Merrill’s global private client group reported revenues for the quarter totaling $2.9 billion, while pretax income jumped to $701 million, up a heady 53 percent from the year-ago quarter. In a research report, Wachovia Capital Markets analysts said fee-based revenues, which now account for half of the unit’s total revenues, were the “primary driver.” (The firm did not disclose fee-based assets.)
Meanwhile, Merrill’s pretax profit margins shot up to 23 percent, putting Merrill head-and-shoulders above the rest in this category. Smith Barney's margins, usually on par with Merrill's, slipped behind in the second quarter to 18 percent. The Citigroup unit attributed that drop in margins primarily to higher compensation expenses, including the integration costs of its Legg Mason retail brokerage business last year, as well as higher legal costs. Meanwhile, Morgan’s pretax margins crept up to 11 percent, from 10 percent in the year-ago quarter, and Wachovia’s rose to 21.1 percent from around 17.4 percent in the year-ago quarter.
Smith Barney, which reported record revenues of around $2 billion for the second quarter, attributed that jump in part to a 29 percent increase in fee-based revenue. Fee revenues were boosted by the firm’s acquisition of the Legg Mason retail brokerage business, the firm said, while fee-based assets grew by almost a third to $313 billion. Net income fell slightly, however, to $238 million, from $239 million.
Wachovia’s retail brokerage, or capital-management unit, meanwhile, generated record earnings of $167 million on revenues of $1.19 billion. Again, analysts attributed the firm’s strong performance to managed account fees. Managed assets at Wachovia grew 35 percent versus the year-ago quarter, to $122 billion.
And finally, Morgan Stanley reported its highest revenues since the first quarter of 2001, at $1.4 billion, due in part to higher revenues from fee-based products and higher net interest revenue from its bank-deposit sweep program, according to its report. Fee-based assets of $190 billion were up 15 percent versus a year ago and accounted for about 30 percent of total assets. Pretax income of $157 million was up 33 percent versus the second quarter of 2005.
As for advisor productivity, Merrill was again in the lead: its advisors generated average annual revenues of $789,000 in the quarter. Morgan Stanley advisors were next in line with $653,000; followed by Smith Barney at just $600,000. Wachovia advisors produced $585,000.(UBS advisors generated average revenues of $638,352 in the first quarter.)
For Morgan the jump in productivity is quite a coup. Last year, for example, Morgan Stanley advisors averaged revenue of just $485,000 per advisor, putting them in last place among their peers. Morgan has said it aspires to an annual average of $700,000 per advisor.