* Retail investors still nursing 2008 wounds
* Recruiting expenses, compliance costs keep rising
* Asset gathering, increasing fees are partial antidotes
By Jed Horowitz and Suzanne Barlyn and Ashley Lau
NEW YORK, Jan 11 After four of the most
difficult years many can remember, brokerage executives and
advisers are on edge about their ability to generate profits in
Equity markets have been on a tear the last two years, but
individual investors side-lined by the 2008 financial crisis
remain wary and are keeping funds in conservative fixed-income
investments despite the advice of financial advisers.
At the same time, executives at Merrill Lynch, Morgan
Stanley and other major firms are contending with rising costs,
defections of top advisers and uncertainties about regulations
and new laws affecting the wealth management business.
Money managers and analysts who follow the wealth management
business agree that the near-term outlook for 2013 is weak.
"Retail brokerage is a pretty good business but it's also a
high fixed-cost business unless they stop paying their
advisers," said Brad Hintz, an analyst at Sanford C. Bernstein.
"Until investors come back, it won't be great."
RAIDS AND RIAs
Broker compensation, particularly for top advisers lured by
seven-figure recruiting bonuses, remains a sore point for big
banks that have been cutting costs and personnel in their
traditional trading and banking businesses.
Morgan Stanley, Bank of America Corp's
Merrill Lynch, UBS AG's UBS Wealth Americas and Wells
Fargo & Co's Wells Fargo Advisors, the four biggest U.S.
brokerages, lost at least 578 advisers managing more than $79
billion in client assets in 2012 while adding 375 with $48.4
billion of assets, according to Reuters data.
While about half moved to another big brokerage, the rest
moved to smaller firms or became independent registered
investment advisers, taking with them at least $35.2 billion in
client assets.. The RIA share of retail client
assets is expected to grow 14.4 percent by the end of this year
from 12.2 percent in 2011, according to Cerulli Associates.
Discount brokerage firms such as Charles Schwab Corp
and TD Ameritrade Holding Corp, often viewed
as proxies for retail investor confidence, are benefiting from
the exodus to RIA firms because they have major businesses
servicing RIA accounts.
But the discounters also are anticipating a slow start to
2013. Active retail traders and investors who trade through
discount brokers fear that stasis in Washington over debt
ceiling limits and budget cuts could ignite a default of U.S.
government debt and trigger market chaos, said TD Ameritrade
Chief Executive Fred Tomczyk, and are likely to be on the
sidelines at least through March.
Even if trading ignites, the Federal Reserve is expected to
keep interest rates at record lows, depressing the net income
brokers book from margin loans to clients and from investing.
Discount brokers also have been foregoing hundreds of
millions of dollars of fees for money-market fund investors who
would have negative returns if the fees were imposed.
That ripples out to the large brokerages. The wealth
management division of Morgan Stanley, for instance, will not
produce a 15 percent profit margin until the third quarter of
2014 despite a promise of hitting a "mid-teen" goal by
mid-2013, according to Bernstein's Hintz. Thin profitability
hurts because about 40 percent of Morgan Stanley's net revenue
has been coming from its retail clients, he said.
A Morgan Stanley spokesman said the company stands by the
mid-teen goal set for the middle of this year, but declined to
define "mid-teen" or comment on Hintz's forecast.
Also complicating this year's outlook for wealth management
firms are new and proposed regulations.
The Financial Industry Regulatory Authority is considering a
plan that could require brokers who move to a new company to
disclose signing bonuses of $50,000 or more to clients they ask
to move with them. [ID nL1E9C88U6] The plan, which may also
apply to other types of bonuses, complicates what many say is
already a challenging task for brokers. That is because
colleagues at the broker's old firm are just as busy trying to
keep the money at the company.
FINRA also is expected to ramp up scrutiny this year of a
new rule requiring brokers to ensure that investment
recommendations are suitable for clients at all times, not just
when they make a trade. The rule, which took effect in July, has
already increased costs vis a vis new technology to improve
real-time monitoring of client accounts.
Also looming is a revised rule proposal from the Department
of Labor that could restrict some brokers' ability to charge
commissions when recommending investments in Individual
Retirement Accounts and other retirement plans. The department
withdrew its proposal last year after backlash from the
brokerage industry but said it will issue a revised rule this
Brokerage firm executives also are lobbying to discourage
Congress from removing or limiting the tax deductibility of
municipal bond profits - an investment class some say is
vulnerable amid Washington's deficit-cutting debate.
One area of good news for wealth managers: Fees tied to
managing client assets have been rising - in part because they
are tied to asset values and not to trades for commission - and
are expected to continue their upward climb throughout 2013.
"The outlook is medium to good, especially relative to
recent years," said Charles "Chip" Roame, managing principal of
consulting firm Tiburon Strategic Advisors.