Stifel global wealth management profits stagnant, revenue up

Stifel's wealth management division posted profits that were nearly identical to last year, while its revenue rose by 6% from a year ago. 

The unit reported on Wednesday that it earned $299.2 million in net income, a marginal decrease of 0.2% from a net income of $299.9 million last year.

Chief Financial Officer Jim Marischen commented on the company's cash sweep policies and sweep deposit costs, following industry-wide concerns. 

Cash sweeps refer to the practice of moving uninvested money from advisory or brokerage accounts to other banks that use the money for lending in exchange for interest income generated for brokerages.

READ MORE: The wealth management industry's $1T conflict of interest

"Let me start by saying that Stifel has been at the forefront of industry trends for much of the cash sorting cycle," Marischen said in a Wednesday earnings call with analysts. "Our Smart Rate product was introduced before rates began to rise and offer clients a competitive savings account, which resulted in the retention of client cash within Stifel. In addition, we positioned our balance sheet to insulate us from interest rate risk and provide acceptable risk-adjusted net interest margin."

Sweep deposits accounted for 1.7% of fee-based client assets, with an average sweep deposit per advisory account of $9.

According to Marischen, 63% of Stifel's pre-rate cycle sweep deposits are put into Smart Rate accounts, with Stifel's sweep deposits totalling $10 billion, and Smart Rate deposits totaling $16 billion. 

Wells Fargo and Morgan Stanley have announced plans to change their cash sweep policies, and LPL Financial faces a lawsuit alleging that it has used the sweeps to inflate its returns. Cash sweeps have even drawn attention from the SEC, which began investigating Wells Fargo at the end of last year for its cash sweep practices. 

Revenue

Stifel's wealth management unit reported $801.1 million in revenue in the second quarter. Transactional revenues and asset management revenues both increased from the same time last year due to higher client activity and higher asset values, respectively. 

"Our annualized results for the first half of the year put us above the midpoint of our guidance and roughly in line with Street estimates for the full-year," said Ronald Kruszewski, chairman and chief executive officer. "Given the current trends we are seeing in the market and the operating leverage in our business, we believe that we are well positioned for a strong second half."

Asset management was the sector that contributed the largest amount to overall revenues. Stifel saw a 19% increase in year-over-year revenue to $380.8 million. The company also saw record advisory revenues, with a 50% increase from last year to reach $131.4 million this year.

Net interest income for the company overall decreased by 15% year-over-year, following changes in deposit mix.

Client assets

The firm had record client assets of $474.1 million, up 14% year-over-year.

The wealth management unit reported that $179.7 million, or 38%, of its client assets generate fee-based revenue.

Advisor headcount

Stifel lost 10 advisors compared to the same time last year, counting 2,359 advisors total in its wealth management arm. The firm recruited 42 financial advisors during the quarter.

In February, Stifel lost its CEO Alex David to Raymond James Financial Services's Northeast division. 

Stifel was ranked as the top firm for overall employee advisor satisfaction by J.D. Power for the second year in a row. The firm was also ranked first place in leadership and culture, products and marketing and operational support.

READ MORE: Commonwealth, Stifel, Raymond James top advisor satisfaction rankings; Wells Fargo Advisors' score jumps by triple digits

"The results of this survey further proves our core values of respecting our advisers and continually improving the adviser experience, which in turn leads to better client experience," said Kruszewski. "Focusing on these values enable Stifel to continually attract and retain high-quality advisers to our platform, provide exceptional client service and has been a foundation to our history of strong revenue growth."

Expenses

Stifel's global wealth management division reported nearly $502 million in expenses, or a 9.5% increase from the same time last year. 

This increase in expenses was driven by labor costs, with an 11% jump in expenditures on compensation and benefits due to higher fees and commissions paid by the company.

The amount spent on commission and revenues increased 17.4% from the same time last year.

Remark

Kruszewski expressed confidence in the company's financial outlook for the rest of the year.

"Stifel generated our second highest quarterly net revenue in company history, as each of our operating segments generated solid year-on-year gains," he said. "Stifel's strong results reflect improved market conditions and illustrate the benefits of our balanced businesses and inherent operating leverage, particularly in our Institutional Group."

Kruszewski said that the company expects the Wealth Management and Institutional Group revenues to make up for losses in net interest income in the current economic climate.

"Let me just state that Stifel anticipated and prepared for this rate cycle, both on the asset side of our balance sheet as well as offering clients options for savings accounts, primarily our Smart Rate," Kruszewski said. "As such, we do not see a material impact relating to this matter."

Last quarter, Kruszewski praised the Labor Department's retirement advice rule and warned against the Fed cutting rate hikes too soon to control inflation in an April 24 earnings call.