Retail-broker business enjoys rosy first quarter

Buoyant market, leaner operations boost revenue, profits

May 1, 2011 @ 12:01 am

By Andrew Osterland

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The wirehouses are back.

First-quarter earnings at Wall Street firms with large financial adviser forces demonstrate that after two years of turmoil, the biggest players in the investment industry have righted themselves and are poised to build their businesses again.

The most persuasive evidence of that may be the positive asset flows at UBS Wealth Management Americas, the U.S. retail arm of the Swiss banking giant UBS AG. The unit, which bled billions of dollars in assets during the financial crisis, took in $8.4 billion in net new money during the first quarter, compared with outflows of about $3 billion a year earlier.

Inflows confirmed a “return of client trust and confidence” in the bank, said Oswald Grübel, UBS AG's chief executive.

“The wirehouses have clearly regained their footing with the positive asset flows,” said Alois Pirker, a senior research analyst at Aite Group LLC.

The two largest firms also saw large inflows.

Morgan Stanley Smith Barney LLC reported net new asset flows of $9.2 billion in the United States.

Bank of America Merrill Lynch reported positive assets under management flows of $7.5 billion.

Wells Fargo & Co. doesn't disclose net new money accumulated by its wealth, brokerage and retirement division.

The banks' quarterly reports showed that their wealth management divisions are recovering much faster than other parts of their businesses, notably consumer and commercial lending.

Three of the four wealth management divisions posted double-digit revenue growth over the first quarter of 2010, with Merrill Lynch growing fastest at an 18% clip and Wells Fargo slowest at 8%. What's more, all four improved their operating margins and posted large gains in profits.

“Like all other industries that experience a bust, the wirehouses have focused on productivity, and they are now in a great position to make money,” said Jack Plunkett, chief executive of Plunkett Research Ltd. “A lot of investors left for smaller shops or got out of the market, but with the indexes up, it's a matter of how, and when, they get back in.”

Regional and independent broker-dealers also posted great numbers for the quarter.

Raymond James Financial Inc., which operates three distribution channels in the investment advice business, had revenue of $852 million, up 16% from a year earlier; its net income surged by 45%.

LPL Investment Holdings Inc. and Ameriprise Financial Inc., the parent companies of the two largest independent broker-dealers, saw revenue grow 18% and 17%, respectively, in the first quarter.

LPL pulled in $3.7 billion in new advisory assets and now has more than $330 billion in total assets under management. Profits nearly doubled to $49 million.

Total assets under management at Ameriprise increased by 50% to $693 billion, in large part because of its acquisition of Columbia Management Investment Advisers LLC.

Even after a $77 million after-tax charge related to legal settlements in connection with Securities America Inc., which Ameriprise owns, the company posted 13% growth in net income. Excluding those expenses, operating earnings of $347 million were up 54% over last year.

Although surging markets are driving stellar financial results across the investment advice industry, Mr. Pirker sees the recovery of the wirehouses as the biggest story in the quarter. And though he doesn't think they are taking back market share just yet, he sees the tide shifting back toward the wirehouses after several very difficult years.

“I think we've passed the heyday of the "going independent' trend for financial advisers,” Mr. Pirker said. “This year is going to be interesting to watch.”

With the appointment of John Thiel as head of its U.S. wealth management division, Merrill Lynch clearly is back in growth mode. Just two years after it had to be saved from bankruptcy by Bank of America Corp., the thundering herd is increasing its ranks again, adding more than 500 advisers over the past 12 months and recently launching a $20 million advertising campaign.

Merrill and other wirehouses aren't the only ones looking to grow, said Rochdale Securities analyst Richard Bové. “The banks are going to get back into the investment advisory business in a big way,” he said.

Along with the biggest players in the industry, Citigroup Inc. and JPMorgan Chase & Co. will look to expand their advisory operations, Mr. Bové said.

“The capital requirements for the business are low and the returns on investment are high. I expect most of them will be investing in the business,” he said.

E-mail Andrew Osterland at aosterland@investmentnews.com.

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