* Retail trading volumes fell, reducing commissions
* Broker churn, merger costs inflated costs
By Joseph A. Giannone
NEW YORK, Jan 19 (Reuters) - Brokerage firms finished 2009 on a high note as rallying markets buoyed investor wealth, but sluggish customer trading, the costs of sweeping consolidation and a wild recruiting war all dragged down profit.
Three of the largest U.S. wealth managers — the business of management investments for individual investors — are expected to report mixed December quarter results Wednesday.
Analysts say the market’s rebound from a catastrophic 2008 — the Standard & Poor’s 500 Index soared 24 percent last year — means increased client assets and greater management fees for the three.
They are: Merrill Lynch, now part of Bank of America Corp (BAC.N); Morgan Stanley Smith Barney, a joint venture of Morgan Stanley (MS.N) and Citigroup (C.N); and Wells Fargo Advisors, the new name for Wachovia Securities since its acquisition by Wells Fargo & Co (WFC.N).
The financial crisis that drove one-time giants rushing into the arms of new owners also fueled integration expenses and kept anxious investors from plunging back into the market.
“It was a very bad quarter, not so much because the world fell part but because in December there was a major decline of trading activity across the board,” said veteran brokerage analyst Richard Bove of Rochdale Securities. “People locked in their profits and chose not to take additional risks.”
Raymond James analyst Patrick O’Shaughnessy told clients last week he expected a 12 percent decline in U.S. equity trading volume for the fourth quarter, along with 3 percent drop in options trading.
TD Ameritrade Holding Corp (AMTD.O), one of the largest online brokers, on Tuesday said earnings for the quarter ended Dec. 31 dropped 26 percent amid thinner trading and the impact of low interest rates. Commissions, fees and trading activity all fell.
JPMorgan Chase & Co (JPM.N) on Friday said private banking revenue soared 15 percent in the fourth quarter from a year earlier but that its wealth management business was flat. Perhaps signaling a trend for other firms, the bank said total compensation rose as it paid up for top producers, even as head count fell.
“Fee-based brokers have rallied off the bottom in March, though the market is still well off from the peak,” said JMP Securities analyst Michael Hecht. “The quarter’s not going to be on fire, but it will be OK.”
The wild card, though, is how the dramatic reorganization of the industry’s top players will affect results. The Morgan Stanley Smith Barney venture, for example, will inflate costs before consolidation benefits kick in.
Industry turmoil also sent thousands of brokers and advisers into motion last year, escalating retention and recruiting bonuses and putting billions of dollars of assets into play.
Discovery Database, a New Jersey industry research firm, told Reuters that 22,901 FINRA-registered brokers changed jobs last year, including 8,667 from the four national “wirehouses”: Morgan Stanley, Merrill, UBS and Wells Fargo.
Graphic on job changes by brokers at the four 'wirehouses,' link.reuters.com/wah54h
Hardest-hit was Morgan Stanley Smith Barney, which suffered a net loss of 1,848 brokers last year, followed by Merrill Lynch, which had a net loss of 991 brokers, according to Discovery. UBS AG UBSN.VX had a net loss of 83 brokers, while Wells Fargo added 51 more brokers than it lost.
“Brokers are in the process of paying retention and recruiting bonuses, and that could pressure the profit margin,” S&P Equity analyst Matthew Albrecht said. “It’s a matter of to what extent and how much are they being forced to pay in compensation.”
Regional firms benefited from the exodus of brokers last year, helping their results.
Analysts expect Raymond James Financial Inc (RJF.N) to report growth in advisers and assets, though the Florida-based company is also expected to report rising credit costs in its bank unit and thinning profit margins.
TD Ameritrade reported that the addition of new independent advisers to its network, many jumping from the big brokerages, played a big role in bringing in $8.7 billion of net new assets.
Beyond the decline in overall trading, brokers are feeling the pinch as exchange-traded funds grab market share from mutual funds thanks to their lower costs and tax advantages. Veteran analyst Brad Hintz of Bernstein Research said ETFs generate less revenue for brokers than mutual funds.
More troubling for retail brokers, Hintz observed, is that the sluggish economy and high joblessness will likely keep small investors on the sidelines until markets revive.
“There is still a lot of conservatism. If history is any guide, retail investors tend not to come back until they feel financially secure themselves,” Hintz said. (Reporting by Joseph A. Giannone; Editing by Gerald E. McCormick and Steve Orlofsky)