The third quarter shaped up pretty well for the retail brokerage divisions of the big Wall Street firms. Despite a continued rough market environment in June through August—with gains of just 1 percent on the S&P 500 and the Dow Jones Industrial Average, and a 2 percent loss on the Nasdaq—the retail client didn’t take his money and run. (Of course, retail clients are emboldened since stocks have been in a long rally: The Nasdaq, the S&P 500 and the NYSE Composite Index are all posting excellent gains for 2006 and hovering within mere points of their 52-week highs.) Most firms recorded positive client asset flows for the quarter, while increased fee revenues offset declining commission revenues. The retail arms of Merrill Lynch, Wachovia and Morgan Stanley reported year-on-year revenue growth and steady or improving margins. But here’s the great news: Market technicians say we’re in the midst of a bull market, and that means things are looking even better for the rest of the year.
“The firm’s did well,” says Sanford Bernstein analyst Brad Hintz. “Commissions went down. Margin loans went down. But all the retail brokerage arms had positive client flows. You didn’t see the kind of thing you saw in 2000 and 2001, when investors picked up their jacks and went home. They’re staying in, and that’s positive.”
Merrill Lynch’s private client group recorded net revenues of $2.8 billion, up 5 percent versus the third quarter last year, and pretax earnings of $611 million, up 4 percent from the year-ago quarter. Pretax profit margins slipped slightly to 21.6 percent from 21.9 percent. Meanwhile, despite the recruiting wars, Merrill says turnover, especially among top FAs, remained at historical lows. Total financial advisor headcount at the firm rose to 15,700 at quarter-end, up from 14,690 at the same time last year.
Merrill, like other firms, continues to push fee-based and annuitized services and products, and client assets in these categories ended the quarter at $578 billion, up 17 percent from the end of the third quarter last year. Total client assets in the global private client group rose to $1.5 trillion, up 11 percent from a year ago. Net inflows of client assets into annuitized revenue products were $7 billion, and total net new money was $14 billion.
Over at Wachovia, the retail brokerage, or capital-management group, recorded earnings of $237 million for the third quarter, up from $156 million in the year-ago quarter. Revenues grew to $1.4 billion, a 9 percent increase year-over-year, as strength in retail brokerage managed account fees, wider deposit spreads and the impact of two June 2006 acquisitions—Golden West and the defined contribution recordkeeping business of Ameriprise—overcame lower retail brokerage transaction activity. Managed assets grew 29 percent from the year-ago quarter, to $129 billion as of Sept. 30, 2006. Total assets under management of $250.1 billion at the end of the third quarter were down slightly from $256.5 billion at the end of the third quarter last year.
At Morgan Stanley, which reported its third quarter on Sept. 20, the retail brokerage turnaround is still in full trot. The global wealth-management unit recorded pretax income for the third quarter of $158 million, up substantially from $30 million in the third quarter of last year. Net revenues of $1.4 billion were up 9 percent from a year ago, reflecting higher net interest revenue primarily resulting from the bank deposit sweep program, an increase in revenues from fee-based products and higher investment-banking revenues. The quarter’s pretax margin was 12 percent, compared with 2 percent in last year’s third quarter.
“It is becoming clear that both [the] sweep program and the introduction of closed-end products are starting to have a quantifiable impact on profitability,” says a recent analyst report from Wachovia Capital Markets. “Attrition rates have stabilized, as [Morgan Stanley] has reduced the FA count and improved average productivity. We do not expect any near-term drastic changes in the FA count going forward. The focus will continue to be on improving productivity.”
Total client assets in Morgan’s retail division came to $652 billion, a 5 percent increase from last year’s third quarter, while asset inflows for the quarter totaled $5.4 billion. Client assets in fee-based accounts rose 14 percent, to $193 billion, over the last 12 months and increased as a percentage of total assets to 30 percent from 27 percent. Meanwhile, the firm had 8,069 global representatives at quarter-end, with record average annualized revenue and total client assets per global representative of $675,000 and $81 million, respectively.
Citigroup doesn’t report earnings until Oct. 19, while UBS reports in early November.