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Hired and Fired Up

The biggest brokerage businesses are showing that even in a modest market upswing they now have in place a strategy for delivering stronger and steadier sales and earnings growth. With the release of their firms' corporate earnings reports last month, Merrill Lynch, Smith Barney, Wachovia and even Morgan Stanley had something to crow about in 2005. (UBS reports this month.) Double-digit gains in sales,

The biggest brokerage businesses are showing that even in a modest market upswing they now have in place a strategy for delivering stronger and steadier sales and earnings growth.

With the release of their firms' corporate earnings reports last month, Merrill Lynch, Smith Barney, Wachovia and even Morgan Stanley had something to crow about in 2005. (UBS reports this month.) Double-digit gains in sales, earnings or both were routine and much of the credit at all the full service firms went to their retail game plan.

At its center is a strategy of having teams of representatives cross-selling an entire suite of investments to wealthier clients and charging an annual fee for the work they do. While reps woo the rich with offers of more products and services, they are doing so with the knowledge that their managers are purging deadwood producers who are husbanding small accounts.

“Firms are getting smarter,” says Benjamin Poor, senior analyst at research firm Cerulli Associates in Boston. “A lot of firms have done a good job diversifying their product lines. And there continues to be a gravitation toward fee-based business.”

To reach more investors and serve them better, they are expanding their sales forces. Their efforts are paying off as their representatives are capturing more of the fee-based assets they're targeting.

“It was a pretty good quarter for most of the firms,” says Brad Hintz, an analyst with Sanford Bernstein in New York. “Retail is doing very well.”

Making the retail picture even brighter are the higher per-capita revenues being generated by financial advisors. Average production per rep among the top four wirehouse firms — Merrill Lynch, Smith Barney, Morgan Stanley and UBS — rose 4.6 percent to $580,000 in 2005, up from $554,000 in 2004, according to Merrill Lynch analyst Guy Moszkowski.

But some firms fared better than others. “Merrill saw the most pickup in traditional retail,” says David Hendler, a senior analyst at CreditSights, a research firm based in New York. “Morgan Stanley still seems like the problem child.”

Merrill: Bigger is Better

Merrill's private client group managed a record 14 percent increase in fee-based revenue in the fourth quarter over the same period in 2004. The surge in fee-based profits can be attributed, in part, to the firm's commitment to increasing the number of representatives it employs and devoting its attention to big-ticket clients. Merrill added 470 financial advisors in the fourth quarter, bringing its total headcount to 15,160, a 7 percent increase from 2004. The company cited its aggressive recruiting efforts and the acquisition of Advest as key growth drivers. About 60 percent of the new reps came over from Advest, analysts say.

The company said it will continue to reinvest in its advisors by supplying them with better technology at their workstations. Chief executive Stanley O'Neal wants advisors generating half of Merrill's overall revenues, up from the current one-third. And they're making progress: The average Merrill advisor produced $734,744 in 2005, up from $711,071 in 2004 — a gain of 3 percent.

Overall, Merrill's net retail revenues for the quarter totaled $2.9 billion, an 11 percent rise from the year-ago quarter. Pretax earnings for the division rose 19 percent to $620 million. Merrill's pretax net profit margin for its private client group rose to 20.2 percent, up from 19.1 percent in 2004. Total assets under management increased 8 percent to $1.5 trillion. “The bottom line on results was that the earnings report was of a high quality across the franchise,” said analyst Lauren Smith of New York banking boutique Keefe Bruyette & Woods in a research note.

Smith Barney: Like No. 1?

Smith Barney, the brokerage arm of Citigroup, did very well indeed in increasing its fee-based revenue. It reported a 19 percent gain for the fourth quarter from the same period a year earlier. Total net revenue came in at $1.78 billion, up from $1.68 billion last year. However, pretax earnings fell 10 percent to $208 million from $230 million in the year-ago quarter due to charges related to the integration of Legg Mason's brokerage force.

Smith Barney had a fourth-quarter pretax profit margin of 19 percent, which reflects integration costs of the Legg swap along with higher compensation and compliance expenses. Assets under fee-based management increased 34 percent to $321 million, up from $240 million a year earlier, on the strength of internal growth and the addition of Legg brokers. Total assets reached $1.13 billion, up 16 percent from $978 million in the year-ago period.

The firm added more than 400 advisors in the fourth quarter, bringing its total to 13,414, up from 12,138 last year. Smith Barney also has plans to add 20 regional development officers to establish training programs for advisors in several disciplines, including practice management, wealth management, client experience and advisor retention. The move underscores the reality that branch managers have been too bogged down with compliance issues to focus on the development of new reps.

Wachovia: Record Run

Wachovia reported record-setting pretax net income in its retail brokerage unit of $147 million up from $140 million a year ago. Revenue rose 2 percent to $1.34 billion from $1.15 billion. Overall, its earnings performance was fueled largely by strong growth in fees, deposits and loans.

Wachovia has increased the size of its sales force marginally even though it has been courting advisors from its wirehouse competitors aggressively. In the fourth quarter it had 8,028 advisors, compared with 7,941 in the prior period and 8,017 in the year-ago quarter. However, the company said the average annual productivity of its new brokers is 35 percent more than those who left the firm.

Wachovia chief executive G. Kennedy Thompson insists the company has been hiring brokers at “a significant rate and will continue to do that” in 2006. By the end of 2007, Wachovia wants 70 percent of its brokerage business to come from fee-based revenue. That would take a 14 percentage-point rise from the 56 percent the brokerage registered at the end of 2005, according to David Carroll, the bank's capital management chief.

Morgan Stanley: Mack Wields His Knife Again

Morgan Stanley's fourth-quarter earnings make it clear that new chief executive John Mack's leadership is starting to pay dividends in the (old Dean Witter) brokerage unit that had caused him so much trouble the last time around.

For the fiscal fourth quarter, the division posted a robust 65 percent surge in pretax profits, earning $84 million on net revenue of $1.3 billion — a 21 percent increase year over year. In other good news, client assets in fee-based accounts increased by $3 billion, or 2 percent, to a record $173 billion, up from $170 billion in 2004.

But not all was well. Pretax operating profit margins fell to 7 percent, from an average of 9 percent for the first nine months. And total client assets was off by $2 billion to $617 billion.

Morgan Stanley brokers have lagged their wirehouse counterparts for several years, something Mack is addressing by bringing in former Merrill retail chief James Gorman this year and firing 1,000 low-producing reps. He's also setting aside bonuses for the brokerage force in 2007. Still, the firm continues to bleed talent even as it's aggressively looking to hire more. The brokerage unit had 9,526 reps at the end of 2005 compared to 10,962 the previous year.

Morgan Stanley's woes notwithstanding, the retail brokerage business appears poised for a period of sustained growth. And if hiring trends are any proxy for the health of the sector, then one could hardly debate that things are looking up. “They're all looking for brokers,” Hintz says. “And that's a very promising sign for this year.”


Vital stats — earning, revenue, FA production — for how the three biggest brokerages on Wall Street fared in 2005.

Morgan Stanley Individual*
Investor Group
Smith Barney Private*
Client Services
Merrill Lynch*
Private Client Group
2003 2004 2005 2003 2004 2005 2003 2004 2005YTD
Total Net Revenues ($MM) 4,242 4,615 5,019 5,844 6,485 6,825 8,893 9,827 10,764 |
Total Operating Expenses ($MM) 3,778 4,244 4,434 4,567 5,016 5,405 7,367 7,954 8,587
Pre-Tax Earnings ($MM) 464 371 585 1,277 1,469 1,408 1,526 1,873 2177
Pre-Tax Margin 10.9% 8.0% 11.7% 21.9% 22.7% 20.6% 17.2% 19.1% 20.2%
Financial Advisors (Global) 11,086 10,962 9,526 12,207 12,138 13,414 13,500 14,140 15,160
Revenue per Average FA $359,005 $418,632 $489,945 $469,454 $532,758 $534,205 $646,764 $711,071 $734,744
Operating Expense per Average FA $319,736 $384,978 $432,839 $366,872 $412,076 $423,059 $535,782 $575,543 $586,143
Pre-Tax Income per Average FA $39,269 $33,654 $57,107 $102,583 $120,682 $111,146 $110,982 $135,528 $148,601
Total Client Assets ($BB) 565 602 617 912 978 1,130 1,267 1,359 1,473
Assets in Asset-Priced Accounts ($BB) 130 157 173 209 240 321 226 257 284
As % of Total Client Assets 23% 26% 28% 23% 25% 28% 18% 19% 19%
Total Client Assets per Average FA ($MM) $45.74 $52.93 $59.50 $71.09 $77.63 $82.50 $86.44 $95.01 $96.66
ROA (Revenue per Average Client Asset) 0.78% 0.79% 0.82% 0.64% 0.66% 0.60% 0.70% 0.72% 0.73%
Revenue per $1B in Assets (in thousands) $7,508 $7,666 $8,135 $6,408 $6,631 $6,040 $7,019 $7,231 $7,308
Operating Expense per $1B in Assets (in thousands) $6,687 $7,050 $7,186 $5,008 $5,129 $4,783 $5,815 $5,853 $5,80
Source: Merrill Lynch Analyst Guy Moszkowski
* (11/30/05 for MS and 12/31/05 for Smith Barney and Merrill Lynch)
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