* FY adjusted net up 19 pct at 480 mln Sfr vs f'cast 495 mln
* 15 mln Sfr in legal fees for U.S. probe dampen profits
* Says been contacted by FINMA as part of forex probe
* Pretax margin weakens to 25.5bp vs 27 in 2012
* Shares down 5 pct, having hit record high last month (Adds CEO comment on FX probe, updates shares, writes through)
By Katharina Bart
ZURICH, Feb 3 Julius Baer suffered a double blow on Monday as yearly earnings fell short of expectations and clients transferring from recently acquired Merrill funds were set to reach only the low end of its target range.
Shares in the Zurich-based private bank, which had hit an all-time peak late last month, were down some 5 percent after the results and traded at 41.85 Swiss francs by 1210 GMT.
Baer posted a 19 percent rise in full-year earnings, missing expectations after legal fees relating to the U.S. probe of banks who allegedly helped rich Americans dodge taxes.
Underlying net profit, after stripping out integration, restructuring and other costs, rose to 480 million francs against forecasts of around 495 million, according to a Reuters poll of 12 banks and brokerages.
Baer also said it would hit the lower end of its target for the transfer of assets invested by former clients of Merrill Lynch's overseas wealth arm, which it bought in August 2012. Baer is presiding over a three-year integration during which it hopes to encourage as many ex-Merrill clients as possible to move their funds to the Swiss bank.
Baer took a 15 million Swiss franc legal provision relating to the U.S. tax investigation. It is one of 14 Swiss banks being targeted by U.S. prosecutors for allegedly offering hidden offshore accounts to help clients avoid taxes.
Baer, which hasn't put aside any funds towards a settlement in the U.S. probe, said it would like to reach agreement with U.S. prosecutors as soon as possible. "Whenever they call us, we're ready," Chief Executive Boris Collardi told journalists.
While Baer, Credit Suisse and unlisted rivals such as Pictet are caught in the crosshairs of the U.S. probe, attention has shifted to the wider Swiss banking industry.
The U.S. Justice Department said recently it had received 106 requests from Swiss entities to participate in a settlement programme aimed at resolving the matter.
According to executives at some of the 14 banks being targeted, settlement talks have stalled until investigations into second-tier banks under the programme are completed.
Regarding the Merrill deal, Baer had a target to transfer between 57 billion francs and 72 billion of client funds following the purchase of the U.S. bank's wealth management business outside of the United States and Japan.
The bank said it is skimming the lower end of that range, mainly due to a weaker dollar - in which most Merrill accounts were held - versus the Swiss franc. Other reasons include that some clients prefer brokerage services to pricier and more sophisticated private banking facilities.
The appeal of the deal was to gain greater access to fast-growing markets in Asia and South America and lessen reliance on Switzerland, but it has also eroded Baer's profitability because the Merrill assets are less lucrative than Baer's.
While its gross margin - a measure of the profitability of assets invested - held steady despite a fall in the second half, the pretax margin weakened to 25.5 basis points from 27 last year. From 2015, Baer targets 30 to 35 basis points.
While Baer's profitability was expected to be undermined by the Merrill deal, particularly after a trading update in October showed profitability weakening and spending edging higher, analysts said the sum of assets being acquired showed the purchase hadn't gone as well as hoped.
However, given the new assets are less profitable than Baer's own, this may be "a blessing of sorts," analysts at Deutsche Bank told investors.
The deal, seen as a key test for CEO Collardi, has also cost Baer more than it bargained for. Last year, Baer said it would spend 55 million francs more than originally planned on its integration. However the numbers transferring will reduce the overall deal price.
The purchase prompted a growth spurt as assets surged by more than a third to 254 billion, including 53 billion in funds from one-time Merrill clients which moved to Baer.
The bank's net new money stood at 7.6 billion francs for the year, which translates to 4 percent growth, at the low end of its target for 4 to 6 percent growth of in client funds.
Including all costs to restructure and integrate, shareholders' net profit for the year slipped to 187.5 million francs, from nearly 268 million last year.
Collardi also said Baer had been approached by Swiss financial regulators as part of a probe into alleged rigging in the $5.3 trillion-a-day foreign exchange market.
The issue appeared to be linked to several individuals joining from larger, undisclosed competitors, Collardi said. The bank said it was in the process of clarifying its position internally. Baer is a minnow in the forex market, which is dominated by the big Global investment banks.
($1 = 0.9057 Swiss francs) (Editing by John Stonestreet and David Holmes)