* Bonuses and new investments make expense growth faster
* Brokerage force grew by 120 advisers during second quarter
* Record client assets of $2 trillion trail those at Charles
By Jed Horowitz
NEW YORK, July 16 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
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
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