Merrill Lynch Wealth profit strained by expenses

Wed Jul 16, 2014 3:04pm EDT

* Bonuses and new investments make expense growth faster than profit's

* Brokerage force grew by 120 advisers during second quarter

* Record client assets of $2 trillion trail those at Charles Schwab

By Jed Horowitz

NEW YORK, July 16 (Reuters) - Bank of America's continuing investment in its Merrill Lynch wealth management business caused expenses in its global wealth sector to grow more quickly than revenue in the second quarter, the company said on Wednesday.

The accelerating expenses and a string of declines in new money under management caused profit in the Global Wealth and Investment Management sector to fall 4.8 percent from a year ago to $724 million, the company said.

The sector, the second-smallest of Bank of America's five businesses, focuses on selling investment products and financial planning services to wealthy individuals and their families. Merrill Lynch and its 13,845 financial advisers generated 83 percent of the sector's total revenue, with the rest coming from the bank's U.S. Trust private banking unit and money-management services within the bank's branches.

The high costs and sluggish asset growth at Merrill contrasts with a report rival Charles Schwab Corp issued on Wednesday. The firm that once focused only on gathering commissions from self-directed investors said the $22.7 billion in new assets it gained in the quarter was the highest in six years, while net income jumped 27 percent from the year-ago quarter.

Merrill Lynch boasted that its client balances reached a "milestone" $2 trillion by quarter end due to new assets and stock market advances. But Schwab ended the quarter with $2.4 trillion in client assets.

Unlike Merrill, Schwab obtains the bulk of those assets from independent investment advisers who direct clients to place assets with and make transactions through the discount broker.

Executives at Bank of America made no apologies for the performance of Merrill and its other wealth management businesses. New assets under management, $12.0 billion, were the lowest in four consecutive quarters but were 74 percent higher than in the second quarter of 2013. A Merrill spokesperson did not comment on the large year-over-year increase followed by quarterly declines.

The bank said it has had 20 consecutive quarters of "positive" flows into client accounts and continues to progress in its core goal of selling more mortgages and portfolio-secured loans through its brokerage force. Loan balances in the wealth management business grew $4 billion during the quarter, to $123 billion, up 7.4 percent from a year earlier.

But costs in the wealth businesses nevertheless grew 5.4 percent, to $3.3 billion, while total revenue inched up only 2.0 percent to $4.59 billion.

The discrepancy between revenue growth and expense growth, known as "operating leverage," hurt profit at Merrill, although bank executives said they are investing for long-term growth. Profit from services for the wealthy is much more stable than other sectors such as investment banking and corporate lending.

"We have made some near-term investments, including training programs and hiring people in the branches," BofA Chief Executive Brian Moynihan said in a conference call with investors. "But (operating leverage) is something we have to monitor closely."

Merrill Lynch paid out more in bonuses and other compensation to brokers than a year ago and has poured $100 million into combining a crazy-quilt of money-management and investment choices for investors into a single platform called Merrill One. The program will increase broker productivity, create efficiencies for clients and limit the ability of brokers to offer reduced commissions to top clients, the company said.

Merrill Lynch wealth management, like most large U.S. brokerage firms, has been trying to shift clients from transaction-based commission accounts to fee accounts that charge the clients a percentage of their account assets. As of the end of June, 46 percent of the firm's advisers had at least half of their client assets in a fee-based relationship, up from 45 percent three months earlier.

At Schwab, about 50 percent of clients receive a fee-based advisory service, the company said.

Asset management fees at Merrill Wealth in the second quarter grew 16.6 percent from a year ago, to $1.5 billion, while revenue per average broker - measured by fees and commissions collected by each - was unchanged from the previous quarter at $1.06 million. Asset management fees at U.S. Trust grew 9 percent from the first quarter to $413 million.

As part of its growth policy, Bank of America is allowing Merrill to reverse years of shrinking its brokerage force. Merrill added 120 brokers during the second quarter, although its 13,845 advisers still number 327 fewer than a year ago. (Reporting By Jed Horowitz; editing by Linda Stern and Dan Grebler)

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