Merrill’s Brokerage Unit Records Huge Second-Quarter Gains

Merrill’s global private client group (GPC) registered a pretax earnings increase of 53 percent, to $701 million, in the second quarter ending June 30, up from $457 million in the same period in 2005.

Pretax operating profit margins also showed a significant gain, rising to 23 percent in the quarter, up from 17.8 percent in the same period a year ago.

The brokerage unit’s success helped Merrill turn in its second most profitable quarter in company history and was even better than the business as a whole, which produced a 44 percent gain in earnings for the quarter.

Merrill’s CFO Jeff Edwards told analysts in the Tuesday morning earnings call that the brokerage unit’s strong performance was driven primarily by fee-based revenues—an area, he says, that “continues to gain momentum.” Second-quarter net inflows of client assets into annuitized-revenue products came in at $10 billion. Total client assets in GPC accounts rose 11 percent to $1.5 trillion.

The number of financial advisors also rose along with profits, as Merrill added a net 170 new FAs in the second quarter, bringing its industry-leading total to 15,520. Despite a fierce recruiting war being waged among the big wirehouses to reel in top producers, Merrill has had success retaining its FAs. In fact, turnover rates are at an all-time low, the company says.

Merrill has been striving to grow its sales force 5 percent a year by recruiting top producers from rival firms, developing young talent and acquiring smaller regional brokerage firms.

FAs, on average, are now generating $780,000 in production, ranking the firm No. 1 in the industry. Revenues for the division increased to $3.1 billion, up $2.6 billion from a year ago, its highest level since the first quarter of 2000.

Analysts say the company is poised to spend more on adding advisors in the second half of the year. “Merrill should have some compensation flexibility to build, attract and retain talent as we head into the second half as they’ve likely accrued about $1.5 billion more comp than at this point last year and headcount is only up 7 percent,” UBS analyst Glenn Schorr wrote in a research note last month.

But Merrill brass maintains that the company will remain disciplined in its approach to recruiting, offering improved technology and products rather than employing a “non-economic” strategy that rewards brokers with absurd signing bonuses that reach 200 percent of trailing 12-months production—an obvious swipe at rival Morgan Stanley.

Still, not everything has gone well for Merrill’s brokerage unit. Last fall, its $400 million takeover of Advest brought 515 advisors into its stable, but an astounding 80 percent of the brokers have since left or retired, according to Registered Rep. research.