Oppenheimer: Net New Assets Will Temper Fee Declines

Investors in retail brokerage firms looking for rays amid the coronavirus-depressed market gloom can find bittersweet solace in Oppenheimer Holdings’ first-quarter earnings report.

“[W]e expect asset management fees to be reduced by around 12% for the second quarter of 2020 when compared to the first quarter of 2020, primarily due to a net positive inflow of client assets which will temper the decline,” the New York-based firm wrote in the May 1 earnings filing.

Since asset management fees are based on quarter-opening balances at Oppenheimer and most other firms, the new assets that flooded into firms during the roaring first two months of last quarter may prove to be a vital offset to valuation declines when second-quarter fees are calculated.

In the first quarter, the S&P 500 fell almost 34% from its all-time high on February 19 to its March low point as the spreading coronavirus pandemic halted the economy and raised anxiety about the near-term future.

At Oppenheimer, clients contributed $1.3 billion of net positive inflows in the first quarter, contributing to assets under management that grew to $28 billion across its private client and asset management businesses in the first quarter.

Other fundamentals of the coronavirus economy are less promising.

Oppenheimer’s first-quarter profit fell 30% from the year-earlier quarter to $7.8 million due largely to plummeting short-term interest rates that the Fed began towards the end of 2019 and heightened in 2020, it said. Deposit sweep income that the firm collected from third-party banks fell by $15.1 million from last year’s comparable period.

“We expect the impact to continue with short-term interest rates expected to remain near zero,” the earnings report said.

Like customers at other retail brokerage firms, those at Oppenheimer went heavily into cash by quarter end as they repositioned their portfolios to escape market volatility. In the short term, the activity helped. First-quarter trading commission grew 23.1% to $103.2 million on an operating basis over the previous-year period. (Advisory fees based on record client assets under management as of yearend 2019 were up 14.5% to $86.2 million.)

Oppenheimer’s small investment banking division, however, suffered an immediate hit. Clients cancelled active mandates by quarter end as their risk appetites plummeted amid the pandemic, eroding “strong results through the first two months of the year,” the company said.

Total revenue at the firm was down 7.2% from the year-earlier quarter.

Oppenheimer has pruned its brokerage force of advisors and managers that it held responsible for sales rule violations and other regulatory issues in the past few years. As of March 31, it employed 1,029 financial advisors. That is off by just three from the end of 2019 but is about 18% less than more than 1,200 who worked at the firm five years ago.

Shares of Oppenheimer, which is controlled by the family of Albert “Bud” Lowenthal, its chairman and CEO, are down by about 35% year to date.