Lex is a premium daily commentary service from the Financial Times. It helps readers make better investment decisions by highlighting key emerging risks and opportunities.
The wealth management business hinges on two things: bull markets and relationships. The current run in stocks – the S&P 500 hit an all-time high this week – is doing its bit. A rising market means increased activity, which boosts transaction fees, and asset appreciation, which increases asset-based fees. Even better, it means more money coming through the door. U.S. equity funds this week notched their biggest weekly inflow since the 2008 financial crisis.
Bank of America this week reported that in the second quarter revenue, margin, net income, asset management fees and loan balances at its global wealth and investment management division hit records (the business includes BofA's crisis-era purchase, Merrill Lynch). Rival wealth managers Morgan Stanley (which recently completed its purchase of Smith Barney) and Wells Fargo also did well.
What of relationships, though? Banks have been pushing their brokers to sell loans and other bank products to their wealth management clients. At BofA's wealth business, loans and leases rose 11 per cent year on year to $112-billion (U.S.). For Morgan Stanley, which is building up this business, loans jumped 43 per cent, but that is off a low base of $25-billion. This cross selling – mortgages, boat loans, margin lending and so on – also helps profitability. At BofA, Morgan Stanley and Wells, revenue growth outpaced that of non-interest expense in the second quarter, and margins rose.
Brokers probably have mixed feelings about peddling mortgages and the like to their precious clients. The clients may not like it much either. The banks, on the other hand, have every reason to love it. Brokers earn when they get clients into investment accounts. When a client takes a mortgage, the bank keeps more of the revenue. Wealthy clients tend to be loyal to their broker, and often follow if the broker moves to a new bank. They are more likely to stay if tied down by a mortgage.
If stocks really start to run, getting rich may be all that matters. But banks should be very careful about preserving the goodwill of their brokers and clients. They will need every bit of it if the bull run, like the one that proceeded it, eventually collapses.