The big financial services players have released their second-quarter earnings, and most private client divisions didn't do as badly as analysts were expecting -- thanks, in part, to an improving equity market. Results were also helped by the continuing transformation of registered reps from stock jockeys (transactional revenue) to comprehensive financial planners (fees on assets), offering banking, mortgages and other services.

"[Brokerage] revenues were, by and large, a little bit better than expected," says one analyst who spoke on the condition that his name not be printed. He noted that transactional revenue continues to fall industrywide by, on average, 9 percent to 10 percent sequentially. The growth of the fee-based assets "continues to help pad margins," he notes.

Charles Schwab enjoyed a 65 percent increase in earnings on a 5 percent gain in revenue in the second quarter, ended June 30. Aggressive cost cutting and a 10 percent gain in client assets (now at $1.1 trillion) were credited for the earnings improvement. The gain in client assets was attributed equally to both an improving market and new assets.

Schwab, once a do-it-yourself trading platform and now a full-service financial company, pleased investors with a continued shift away from online trading revenue. "Trading revenue and asset management were 13 percent and 4 percent below our forecast," writes Daniel Goldberg, an analyst with Bear Stearns. "However, an increase in client assets has more than offset the decline in trading revenue." He adds that the quarter's results indicate "the company is successfully making a strategic shift in the business model." The firm brought in $11 billion in new assets, 85 percent of which went into accounts with some ongoing advisory component," says Goldberg. (For more details, go to www.aboutschwab.com/press/press-release.cgi?release_id=731033.)

At Merrill Lynch, net income beat expectations by rising 6 percent, to $1.14 billion, over the second quarter a year ago ( www.ir.ml.com/earnings.cfm). But analysts cautioned that the gain was largely driven by strong results in fixed-income trading and the profit of a single private-equity investment. As for its retail brokerage, the giant is hiring aggressively, adding 240 reps in the quarter and 420 this year; its distribution force now ranks at 14,420, just eking out the No. 1 spot over Smith Barney, which has 13,543 reps, including Legg Mason's FAs.

"Merrill is hiring, and you don't hire if you don't think the market is recovering," says Brad Hintz, an analyst with Sanford Bernstein. The private client group reported $2.57 billion in revenues, up 7 percent from a year ago. Net income was up 5 percent from a year ago, to $457 million.

"Merrill's numbers looked fine, especially when compared to year ago when the environment was dismal for retail," says Hintz. Fee-based assets and fee-based revenues were also up 9 percent and 7 percent, respectively, from a year ago. Total client assets at the firm were $1.35 billion, up 5 percent from a year ago.

At Smith Barney's retail brokerage, whose results tend to trend with Merrill's, results were better, despite its parent Citigroup's lackluster earnings (poor fixed-income trading was to blame). Net income was $239 million in the second quarter, 13 percent better than last year at the same time. Total revenues, of $1.65 billion, were 4 percent better than last year. Total client assets reached $987 billion, a 7 percent improvement over the second quarter last year. (For details, go to www.citigroup.com/citigroup/fin/data/qer052.pdf.) Fee-based revenue showed strong growth, jumping by 12 percent over last year; that was offset by a 5 percent decline in revenue from transactions. Assets in fee-based accounts reached $245 billion, a 10 percent increase over the prior year's period.

Wachovia Securities, long burdened by Prudential Securities indigestion, has officially completed its merger now. The firm's Capital Management Group, including retail brokerage and asset management, reported total revenue of $1.34 billion, down 2 percent from a year ago. Net income increased 13 percent, from $139 million last year to $157 million in the second quarter. Total client assets reached $656 billion, a 6 percent increase from last year. The number of FAs is now 7,883, down 126 from a year ago (For more information, go to wachovia.com/file/wb2Q05pr.pdf.)

Morgan Stanley -- whose board of directors is now being sued for the sweetheart severance package paid to ousted CEO Phil Purcell -- had a tough quarter. And some believe it's a long road ahead for the troubled wirehouse. The firm's Individual Investor Group's pretax income fell to $118 million, an 11 percent drop from last year on a 2 percent increase in revenue (to $1.238 billion) from a year ago. Total client assets grew by 6 percent from last year. Fee-based assets account for 27 percent of total assets, up 2 percent from a year ago. "The long-term outlook is, 'How much worse can it get?'" says Jeff Harte, an analyst with Sandler O'Neill. "The impression of investors is that with some improvements, better client segmentation for instance, it can only go up from here." (Go to www.morganstanley.com/about/ir/shareholder/2q2005.pdf for details.)

Obviously, the brokerage industry's earnings were mixed and the equity market isn't stellar, yet investors are returning to the sector in a big way: The Dow Jones Broker/Dealer index has jumped more than 20 percent since May. But then the market at large is doing better -- the S&P has leapt by more than 8 percent since early May. Frank Fernandez, chief economist at the Securities Industry Association, is somewhat surprised. "What's interesting about the apparent comfort [of investors], is that it's happening while overall earnings are declining, interest rates are rising and oil is at $61 a barrel. In the past this has been the stuff of recessions!"