October 14, 2015 / 10:51 PM / 4 years ago

Bank of America wealth earnings slammed by stock market rout

NEW YORK, Oct 14 (Reuters) - Bank of America Corp said its wealth management business’ income plunged 19 percent in the third quarter, underscoring how stock market selloffs can torpedo even an area that banks see as relatively safe and stable.

The bank said that with the U.S. stock market falling during the quarter, many clients shrank from trading, cutting the brokerage unit’s commission revenue. There were also fewer initial public offerings and sales of new mutual funds to help generate commission income. The value of client accounts also fell, which reduced its revenue from clients that pay a percentage of their brokerage assets as a fee.

“When market activity is lower, we tend to see less activity in the transactional side of that business,” said Chief Financial Officer Paul Donofrio, speaking on a conference call with analysts.

The lower revenue helped cut net income in the bank’s wealth and investment management unit, which includes its Merrill Lynch brokerage business, to $656 million in the most recent quarter from $812 million in the year-ago quarter.

Banks across Wall Street, including Morgan Stanley, which reports its results on Monday, have been investing in their wealth management businesses, which can provide more stable revenue than their trading arms.

The Standard & Poor’s 500 index fell 7 percent during the third quarter, including an 11 percent drop during one week in August. When revenue declines at brokerage businesses, profit can fall much more because wealth management has high fixed costs. Bank of America’s wealth management revenue fell 4.2 percent, which triggered the 19 percent profit drop.

At least some of those fixed costs come from recruiting experienced new brokers, who can increase the bank’s future revenue by bringing clients with them. Experienced brokers usually demand guaranteed bonuses to switch firms.

BofA Chief Executive Brian Moynihan said he is not interested in slowing down on recruitment to cut costs for now.

“We still believe the right trade is to continue to invest in growth,” Moynihan said on the conference call.

Merrill Lynch had 14,563 advisors at the end of the quarter, up 193 from the second quarter.

“At the end of the day, if they’re adding to that business they are going to have some profit hits during problematic markets,” said George Pearkes, an analyst at Bespoke Investment Group, an asset management firm in Harrison, New York. (Reporting By Jed Horowitz, editing by Dan Wilchins and Christian Plumb)

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