The financial markets continue to enjoy new record highs, and the S&P 500 and Dow Jones indexes are trading up more than 10% year-to-date, despite volatility the past month.
Meanwhile, broker-dealers are not faring as well. As a group, their shares have ticked up just 5% year-to-date, as tracked by the iShares U.S. Broker-Dealer ETF (IAI). This comes despite the fact that broker-dealer financial results have been pretty decent.
For instance, the broker-services and investment banking industry had an average improvement in earnings of 26% in the third quarter versus a year ago. At the same time, its sales expanded close to 12%.
(Related on ThinkAdvisor: 12 Best & Worst Broker-Dealers: Q2 Earnings, 2014.)
Regulatory issues and costs tied to compliance and litigation affected several of the major broker-dealers in the period ended Sept. 30.
Read on to see which 13 broker-dealers outperformed the financial industry's average EPS growth rate, and which ones underperformed.
WORST BROKER-DEALER
13th Place
BANK OF AMERICA (BAC)
By any measure, Bank of America's whiplash profit-to-loss swing of nearly $2.3 billion was horrible. BofA had a third-quarter net loss attributable to shareholders of $70 million, or $0.01 per share, versus a profit of $2.22 billion, or $0.20 per share, a year ago.
Its net income, including preferred stock dividends, declined sharply to $168 million in the period ending Sept. 30 from $2.5 billion a year earlier, mainly because of its latest mortgage settlement — which involved a pretax charge of $5.3 billion and took $0.43 per share off earnings, according to the bank.
Analysts had expected BofA to post a loss of $0.09 per share, according to Thomson Reuters. However, adjusted earnings per share (excluding an accounting gain) were $0.40, beating estimates compiled by Bloomberg.
Total revenue in Q3'14, net of interest expense, was $21.43 billion, down from $21.73 billion last year. Analysts had anticipated sales of $21.36 billion in the period ending Sept. 30.
BofA, which is led by CEO Brian Moynihan, said four of its five business lines, including wealth management, had higher net income in Q3'14 vs. last year's results.
Global Wealth and Investment Management, which includes the results of Merrill Lynch and U.S. Trust, reported net income of $813 million, compared to $720 million in the third quarter of 2013 and $726 million in the prior quarter.
Revenue increased about 1% from the year-ago quarter and 7% from Q2'14 to nearly $4.7 billion, driven by "higher non-interest income related to improved market valuation and long-term AUM flows," BofA says.
As for its advisor headcount, BofA says it has some 15,868 advisors — up from 15,560 in the prior quarter and 15,624 a year earlier. Excluding advisors in the consumer and business-banking segments, the group includes 14,000 registered reps, an increase of 155 from last quarter.
Merrill Lynch advisors had average yearly fees and commissions of $1.08 million as of Sept. 30, 2014, up from $1.06 million as of June 30, 2014, and $1.0 million as of Sept. 30, 2013. Veteran advisors have annual production of about $1.4 million.
12th Place
RCS CAPITAL (RCAP)
RCS Capital reported a loss in its third-quarter results of $32 million, or $0.59 per share loss, versus a gain of $11.1 million, or $0.17 a share, in the year-ago period.
On an adjusted (or pro-forma) basis, earnings were $35.5 million, $0.40 per share, vs. $23.5 million, or $0.27 per share, in Q3'13.
On a conference call with analysts, executives were clear about the many options they are considering in the face of a rapidly declining stock price and issues tied to sister company American Realty Capital Properties' (ARCP) disclosure of accounting errors on Oct. 23.
That disclosure has led some broker-dealers and custodians to halt sales of products distributed by RCAP under the Cole and AR Capital brands. (See Schwab, Fidelity Stop Sales of Schorsch-Led Nontraded REITs)
Asked by an equity analyst about whether they are willing to break up the company and possibly spin off Cetera Financial Group, RCAP CEO Michael Weil said, "As we've indicated, there is not one thing that we are not willing to look at, and we will look at [everything] on a long-term strategic basis involving the broker-dealer operations and will come back to the market at the appropriate time with the results of that strategic review."
RCAP's multiple broker-dealers include 9,139 affiliated independent advisors.
11th Place
STIFEL FINANCIAL (SF)
Stifel Financial had net income from continuing operations of $39.9 million, or $0.52 per share, compared with net income of $69.7 million, or $0.93 per share, in the prior-year quarter (when the company reported certain non-recurring items). This represents a 43% drop in profits.
Net revenues, though, were $523.5 million, up 9.4% year over year. These results were propelled by higher global wealth management and institutional group revenues.
Global Wealth Management' net revenues increased 15.5% to $317.3 million, on a year-over-year basis.
Stifel Financial's non-interest expenses were $457.7 million, up 2.2% from the year-ago quarter.
"In the third quarter, we had record results in Global Wealth Management and solid results in Investment Banking," stated Ronald J. Kruszewski, chairman and CEO of Stifel.
"Our results reflect two months of our partnership with Oriel Securities, our U.K. investment bank," Kruszewski said. "The initial integration is going well and we look forward to their future contributions. Looking ahead, we expect to close the acquisition of Legg Mason Investment Counsel in November, which will add $9 billion in client assets."
10th Place
LPL FINANCIAL (LPLA)
LPL Financial reported that its net income fell nearly 12% to $33.3 million, or $0.33 per share, in the period ending Sept. 30, from $37.6 million, or $0.36 per share, a year ago. Net sales grew 3% from last year to $1.09 billion.
On an adjusted basis, net income dropped 18% to $48.8 million, or $0.48 a share, from $59.6 million, or $0.56, the company says. Its reported results met S&P Capital IQ consensus estimates.
The latest earnings results included $23 million in regulatory charges, which were $18 million above expectations and cut earnings by $0.11 per share.
The firm has 13,910 affiliated advisors vs. 13,840 in the prior quarter and 13,563 a year ago. The number of custom clearing subscribers stands at 4,407, compared with 4,444 in Q2'14 and 4,492 in Q3'13.
Average annual fees and commissions per advisor, or yearly production, is $248,000, down from $251,000 in the prior quarter but up from $245,000 a year ago. The firm says the level of its production payouts is 86.67%, including base pay and production bonuses.
The level of assets custodied at LPL Financial by independent RIAs is $83.8 billion as of Sept. 30, up 53% from a year ago and 7% from the prior quarter. The firm is working with 330 RIAs vs. 228 in Q3'13.
9th Place
WELLS FARGO (WFC)
Wells Fargo, one of the largest mortgage lenders, reported third-quarter earnings and revenue in line with analysts' expectations. The bank reported a net income of $5.7 billion, up 3% year over year, and earnings per share of $1.02 that were also up 3% from last year.
Analysts polled by Thomson Reuters expected earnings to hit $1.02 a share on $21.1 billion in revenue. Revenue hit those expectations, with Wells Fargo reporting revenue of $21.2 billion for third quarter 2014, up 4% from last year.
Wells Fargo's Wealth, Brokerage and Retirement unit reported net income of $550 million, up $6 million, or 1%, from second quarter 2014.
The retail brokerage group's client assets were up 8% from the prior year, reaching $1.4 trillion in the third quarter, and its managed-account assets increased 17% year over year, or $59 billion, to reach $409 billion in the quarter. The bank also reported strong loan growth with average balances up 19% year over year on growth in first mortgage and security-based lending.
Wealth management assets were $219 billion in the third quarter, up 7% year over year. The unit's retirement group reported IRA assets were $354 billion, up 8% from last year, and institutional retirement plan assets were up 6% year over year with $314 billion in the third quarter.
Wells Fargo said it had a total of 18,772 registered representatives as of Sept. 30 — up from 18,661 in the prior quarter. Its level of client assets is $1.4 trillion.
Of this group, 15,163 are financial advisors, down from 15,189 as of July 30. The majority of these reps — 10,178 work at Wells Fargo Advisors branch offices. About 3,210 work in bank branches, with the remainder — 1,774 — working as independent Wells Fargo Financial Network (or FiNet) reps.
The group also includes 3,609 licensed bankers and 76 clearing firms. The number of bankers rose from 3,472 last quarter, while the number of clearing firms declined by one.
8th Place
CITIGROUP (C)
Citigroup, the third-biggest U.S. bank, reported its net income rose 7% year over year to $3.4 billion in the third quarter 2014, or $1.07 per diluted share, on revenues of $19.6 billion. Earnings per share beat analysts' expectations of $1.12, reporting $1.15 a share excluding accounting adjustments.
Citigroup shared recently that it was ending consumer operations in 11 more countries – affecting consumer franchises in Costa Rica, the Czech Republic, Egypt, El Salvador, Guam, Guatemala, Hungary, Japan, Nicaragua, Panama and Peru, as well as the consumer finance business in Korea.
"I am committed to simplifying our company and allocating our finite resources to where we can generate the best returns for our shareholders," said Michael Corbat, CEO of Citi, in a statement. "While we have made progress optimizing these 11 consumer markets, we believe our Global Consumer Bank will achieve stronger performance by focusing on the countries where our scale and network provide a competitive advantage."
