Wells Fargo Advisors Q3 earnings rise on higher interest rates

Wells Fargo advisor defections taper as interest rates spike earnings

October 17, 2022 2:18 PM

Wells Fargo's wealth management unit recruited more large-producing financial advisors in the third quarter, even though the megabank's regulatory troubles pushed down its overall earnings.

The headcount for Wells Fargo Advisors and Wells Fargo Advisors Financial Network fell by more than 540 year over year in the third quarter, but representatives for the wirehouse said nearly all of the net losses stemmed from retirements and other advisor exits from the industry.

Wells Fargo picked up double the number of advisors that generate $1 million in revenue per year than it did at the same time a year ago, when its headcount tumbled by more than 1,240. The Wealth and Investment Management division raked in profits that surged by double digits because of higher interest rates, according to its Oct. 14 earnings statement.

In an earnings call with analysts, CEO Charlie Scharf discussed the company's ongoing regulatory focus and approach to the mix of volatility and inflation in the larger economy. Consumers with deposits at the bank "are still not showing elevated risk concerns" from cash flow, payroll costs and overdraft fees while debiting more money toward entertainment and fuel, Scharf said. His upbeat but uncertain remarks about the economy matched the tone of JPMorgan Chase CEO Jamie Dimon's comments on the rival megabank's earnings call.

"Labor demand remains robust, consumer balance sheets remain healthy and customers have capacity to borrow," Scharf said, according to a transcript by Motley Fool. "We are closely monitoring risks related to continued impact of high inflation and increasing rates as well as the broader geopolitical risks and we do expect to see increases in delinquencies and ultimately, credit losses. But the timing remains unclear."

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For the key wealth management takeaways from Wells Fargo's third-quarter earnings, scroll down the slideshow. To view coverage of the bank's overall earnings, click here. For a look at Wells Fargo's second-quarter wealth earnings, follow this link.

Financial advisor headcount

The firm's headcount losses underscore mixed recruiting trends over the past five quarters. The number of financial and wealth advisors dipped 4%, or a net 541, year over year to 12,011 in the third quarter, which is less than half its headcount loss of the same time a year ago. Net exits came in nearly 100 lower than in the second quarter, but substantially higher than in the first period of 2022 and in the final three months of the prior year.

Asked about the falling headcount, Wells Fargo spokeswoman Shea Leordeanu said in an email that the firm sees "strong hiring momentum" based on the influx of large producers and gains in the bank branch-based channel of the wirehouse.

"We have a strong recruiting pipeline as our multi-channel model is a powerful differentiator that allows advisors choice to manage their careers and take care of clients," Leordeanu said. "Almost all of the net change in headcount this quarter is driven by retirements and those who left the industry. With our strong succession program, [Wells Fargo Advisors] retains the majority of client assets when an advisor retires."

Financial advisor production

Despite slumping stocks that reduced the value of client assets during the quarter, Wells Fargo advisors reaped higher revenues on average. Annualized revenue per advisor rose 6% year over year to $1.21 million. Commissions and brokerage service fees, as well as net interest income that soared 71% to $1.09 billion, drove the higher revenue across the wealth unit.

Client assets

Stock losses made a dent in the wealth unit's client assets. Total client assets dropped 16% from the year-ago period to $1.76 trillion in the third quarter, with advisory assets down 18% to $756 billion and brokerage holdings tumbling 14% to a little more than $1 trillion. Since most advisory fee numbers relate to the value of stocks at the end of the second quarter, the lower losses in the asset class in the recently completed period will generate a "less significant" decline for the next quarter, according to Chief Financial Officer Mike Santomassimo.

Expenses

Even though its parent company's costs are rising due to its continuing regulatory woes, the Wells Fargo wealth unit's noninterest expenses are tapering off during its reorganization over the past year. The firm is reducing its real estate footprint, cutting third-party costs and converting mailing of documents into digital delivery. Noninterest expenses decreased 4% year-over-year to $2.80 billion in the third quarter because of lower revenue-related compensation and the impact of those "efficiency initiatives," according to the firm.

Earnings and revenue

The wealth unit generated $639 million in net income on revenue of $3.67 billion in the third quarter as higher interest rates drove up the firm's business. Profits jumped 10% year over year, while revenue ticked up 1%. The lower valued stocks that reduced noninterest income by 14% nearly offset the higher net interest income on the topline revenue.

Remark

The wealth manager's parent megabank sustained operating losses of $2.2 billion from litigation, customer remediation and regulatory matters in the quarter. In his prepared remarks, Scharf expressed confidence in the company's ability to finish the "significant body of work" it will take to address the company's regulatory problems, which include a $145-million settlement with the Labor Department last month over an investigation into Wells Fargo's 401(k) plan. He said fixing the company's legal woes remains Wells Fargo's primary focus.

"As we continue our work to put our historical issues behind us and to address issues that are identified as we advance our risk control infrastructure work, outstanding issues still remain that will likely result in additional expense in the coming quarters which could be significant," Scharf said. "We are working to close these as quickly as possible and we remain committed to doing right for our customers and working closely with our regulators and others to resolve these matters. We recognize the importance of moving forward and the expenses in the quarter are representative of these efforts."