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Wells Fargo Profit Plunges 70% in Wealth and Investment Management

Wells Fargo's wealth unit reported net income of $180 million during the second quarter, down 70% year over year and 61% sequentially, as advisor head count continues to shrink.

Wells Fargo & Co. reported Tuesday its wealth unit took a major hit in the second quarter, with net income dropping 70% year over year and revenues down 10%, as head count continued to erode. The wealth and investment management unit posted net income of $180 million, down 61% sequentially, and revenues of $3.7 billion, down 1% from last quarter.

“This was clearly a very poor quarter for us,” said Charlie Scharf, CEO of Wells Fargo, on the company’s earnings call Tuesday. “Our view of the length and the severity of the downturn has deteriorated” since the first quarter, he said, adding that he doesn’t expect conditions to improve anytime soon.

The wealth unit’s drop in net income was due in part to the parent company’s liquidity issues. Company executives said it took higher allowances for credit losses, which cut across all its divisions. It reported a $255 million increase in allowances for credit losses within the wealth unit. Lower market valuations at the beginning of the quarter were also a culprit.

The lower revenues in the wealth unit were attributed to lower asset-based fee income, lower net interest income and a drop in brokerage transaction fees. The wealth management unit was the only one that could claim a profit for the quarter.

Yet the wealth unit continued to lose advisor head count, coming in at 13,298, down by about 500 advisors from the same period last year and 152 from the first quarter.

Kim Yurkovich, a spokeswoman for Wells Fargo Advisors, said via email that while departures increased in the second quarter, many of those who left were below-average producers, making the head count numbers misleading as they relate to profit generation.

“The productivity of our experienced new hires rose again this quarter to a strong $855,000, which is 1.6x the production of departing advisors,” she said. WFA’s strategy, she continued, which will shape itself out over the next couple years, “is to focus on a highly productive team of advisors, and to manage out underperformers. We anticipate that the number of advisors will continue to decline as we continue this strategy.”

Assets under management at Wells Fargo Advisors, which makes up the bulk of the wealth management unit, was $1.6 trillion, up 12% sequentially but down 4% from the prior year.

Kent Christian, president of Wells Fargo’s independent contractor channel, has lauded Scharf’s efforts to turn the firm around since he was brought on last fall to improve its image in the wake of scandals.

On the call, Scharf said he continues to improve the company’s image. He noted that in the past quarter alone he has boosted the firm’s risk, regulatory and controls structures, which regulators had cited as key faults with the company that prior leaders failed to address.

Scharf also said he has made efforts to address diversity and inclusion. For instance, he said, all operating committee members, which include the heads of Wells Fargo’s various business units, will be evaluated at year-end based on their success at promoting diversity and inclusion, and it will directly be factored into their compensation.

UBS analysts Saul Martinez and Robert Placet maintained their sell rating on the company given its “limited line of sight on profitability recovery.” Goldman Sachs analysts Richard Ramsden and James Yaro maintained neutral ratings on the company.

Wells Fargo shares were down about 5% by 2:50 p.m. Eastern time on Tuesday, but they have been tumbling since early June, when Morgan Stanley CEO James Gorman revealed that his firm would take a major hit in the second quarter due to COVID-19 pressures.

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