Wells Wealth Division Profit Down 70%, Advisor Count Extends Slide
Wells Fargo & Co. issued a dire second-quarter earnings report and outlook on Tuesday, which extended to a 70% decline in profit at its wealth and investment management division.
Revenue, client assets and advisor headcount declined in the wealth division, which includes Wells’ more than 13,000 brokers as well as its private bankers. But the division, which comprised 20.5% of Wells Fargo’s revenue, was the only of the bank’s three business segments to post a profit in the quarter.
“We are extremely disappointed in both our second-quarter results and our intent to reduce our dividend,” Chief Executive Officer Charlie Scharf said in a statement. “Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter.”
Wells is the first large bank with a significant wealth management unit to report second-quarter results, and they signal rough times.
The wealth division’s net income plunged to $180 million from $602 million in the second quarter of 2019. The decline followed a 20% drop in the first quarter, and reflected in large part a dire credit outlook affecting the whole bank. The wealth unit set aside $257 million for expected loan losses (a sliver of the bank company’s record $9.5 billion provision across all businesses).
The wealth division’s revenue slumped 10% to $3.66 billion as asset-based fees, net interest income and brokerage transactional revenue all declined.
The Covid-19 pandemic affected cross-selling, a metric showing referrals of clients from Wells’ vast retail banking network to its wealth and investment managers, the company said. Referred assets during the quarter plummeted 43% to $1.5 billion from the year-earlier second quarter, and were off 45% from this year’s first quarter.
Pre-pandemic challenges from the bank’s fake account scandal that exploded almost four years ago also continued to hurt the wealth unit as more advisors fled than arrived during the quarter.
Wells Fargo Advisors officials had earlier boasted that June was their best recruiting month in a decade, but on Tuesday the company said its broker count among employee and independent advisors fell 4% from a year ago and 1% from the end of the first quarter to 13,298, a year-over-year net loss of 501 advisors. The decline came despite elevated signing bonuses Wells has been dangling to fill empty desks.
Wells Fargo Advisors had 15,086 brokers on Sept. 30., 2016, the month before the fake account scandal was disclosed.
Desari Mueller, a Wells spokeswoman, said the net declines reflect to a large part greater numbers of retiring advisors and those with low production, a trend that should continue over the next few years even as the company continues to recruit experienced brokers.
“Our strategy is to focus on a highly productive team of advisors, and to manage out underperformers,” she said. “The overall headcount number is not a strong predictor of revenue growth.”
The average trailing-12-month revenue of experienced advisors who joined Wells Fargo last quarter was $855,000, 160% higher than the revenue of departing advisors, she said.
Client assets at the retail brokerage business fell 4% from a year earlier to $1.6 trillion in transactional and advisory accounts, but were up 12% since March 31, 2020.
Advisory assets rose 1% to $569 billion, but were up 14% from the end of the first quarter. Market valuation gains were partially offset by net outflows in Wells Advisors’ correspondent clearing business for smaller brokerage firms, the company said.
Like most large wealth firms, Wells Fargo bills fees to advisory account clients on their balances at the start of each quarter. The virus-induced market downturn in March clipped those balances, but gains in the second quarter signals higher fees for the third quarter, the company said.
Rock-bottom interest rates cut net interest income in the wealth and investment management division by 15% from the first quarter and by 29% from a year earlier, partially offset by higher deposit balances as clients moved from investment accounts to cash.
Morgan Stanley and Merrill Lynch Wealth Management, which report second-quarter results on Thursday, have also signaled they will report big declines in interest revenue and margins.