US broker results hit by sluggish trading

Analysts say the market8217;s rebound from a catastrophic 2008 8212; the Standard amp; Poor8217;s 500 Index soared 24 per cent last year 8212; means increased client assets and greater management fees for the three.

They are: Merrill Lynch,now part of Bank of America Corp; Morgan Stanley Smith Barney,a joint venture of Morgan Stanley and Citigroup; and Wells Fargo Advisors,the new name for Wachovia Securities since its acquisition by Wells Fargo amp; Co.

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.

8220;It was a very bad quarter,not so much because the world fell apart but because in December there was a major decline of trading activity across the board,8221; said veteran brokerage analyst Richard Bove of Rochdale Securities. 8220;People locked in their profits and chose not to take additional risks.8221;

Raymond James analyst Patrick O8217;Shaughnessy told clients last week he expected a 12 per cent decline in US equity trading volume for the fourth quarter,along with 3 per cent drop in options trading.

TD Ameritrade Holding Corp,one of the largest online brokers,on Tuesday said earnings for the quarter ended December 31 dropped 26 per cent amid thinner trading and the impact of low interest rates. Commissions,fees and trading activity all fell.

JPMorgan Chase amp; Co on Friday said private banking revenue soared 15 per cent 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.

8220;Fee-based brokers have rallied off the bottom in March,though the market is still well off from the peak,8221; said JMP Securities analyst Michael Hecht. 8220;The quarter8217;s not going to be on fire,but it will be OK.8221;

The wild card,though,is how the dramatic reorganization of the industry8217;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,said that 22,901 FINRA-registered brokers changed jobs last year,including 8,667 from the four national 8220;wirehouses8221;: Morgan Stanley,Merrill,UBS and Wells Fargo.

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 had a net loss of 83 brokers,while Wells Fargo added 51 more brokers than it lost.

8220;Brokers are in the process of paying retention and recruiting bonuses,and that could pressure the profit margin,8221; Samp;P Equity analyst Matthew Albrecht said. 8220;It8217;s a matter of to what extent and how much are they being forced to pay in compensation.8221;

Regional firms benefited from the exodus of brokers last year,helping their results.

Analysts expect Raymond James Financial Inc 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.

8220;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,8221; Hintz said.