Wells Fargo's wealth management business is, like every investor and economic participant, waiting on the Fed to cut interest rates. Until that time, customer movement into accounts with bigger yields outside of the firm will keep putting a dent in the wealth division's bottom line.
Despite strong performance in stock and bond markets that fueled a surge in clients' advisory and brokerage accounts, the megabank's wealth unit had a roughly flat second quarter, Wells Fargo said in its July 12 earnings report. Interest profits across the bank's business could fall by as much as 8% or 9% from the prior year in 2024, although the company noted in its investor presentation that "we are only halfway through the year and many of the factors driving net interest income are uncertain."
For now, Chief Financial Officer Mike Santomassimo disclosed on a call with analysts that company officials expect revenue for Wells Fargo's Wealth and Investment Management unit to be $350 million lower this year due to paying clients higher yields in cash sweeps. The change occurred in the second quarter and applies to only one type of account, Santomassimo said.
"This was very specific to a sweep product in the wealth business," he said, according to a transcript by investment website Seeking Alpha. "So it's a portion of that overall deposit, and it doesn't have any bearing on any other products. So I would just leave that very specific to that one individual product in fiduciary accounts or advisory accounts."
Meanwhile, the bulked-up asset values outpaced the company's expectations for expenses such as revenue-related compensation for financial advisors and compliance and regulatory costs. In addition to its continuing stream of regulatory charges, the megabank paid a hefty $336 million in the first half of the year as part of a ballooning "special assessment" on large institutions by the Federal Deposit Insurance Corporation in the wake of last year's regional banking crisis.
For the key wealth management takeaways from Wells Fargo's second-quarter earnings, scroll down the page. Click here to view Financial Planning's analysis of the financial advisor recruiting loan balances carried by Wells Fargo and other giants of the industry, here for the details of a current lawsuit alleging the firm violated nonsolicitation rules or here for the story of a donation by the megabank's philanthropic arm for a program testing the impact of financial planning on an effort to build wealth in a gentrifying neighborhood of St. Louis.
And follow these links for FP's coverage of the firm's first quarter and fourth quarter of 2023 earnings statements.
Note: Unless otherwise noted, all metrics below refer to Wells Fargo's Wealth and Investment Management segment, which is the home of Wells Fargo Advisors, Wells Fargo Advisors Financial Network, Wells Fargo's private bank, its custodian and its digital trading accounts. The company doesn't break out metrics specific to those parts of its business.
Client assets
Rising asset values boosted client assets by 10% year over year to $2.2 trillion in the second quarter. Advisory holdings jumped 11% to $945 billion, while brokerage assets and other client deposits rose 9% to $1.26 trillion.
Expenses
Elevated client assets brought higher expenses. Revenue-related compensation tied to those values and climbing operating losses ran above some expense-saving programs and some lower costs. Noninterest expenses increased 7%, or $219 million, from the year-ago period to $3.19 billion.
Earnings and Revenue
In a factor that yielded a disappointing quarter for the wealth unit's megabank parent overall, smaller deposit balances and bigger costs "as customers reallocated cash into higher yielding alternatives" pushed down interest income in the division, according to the firm. Net interest income fell 10%, or $103 million, year over year to $906 million.
That hit reduced the wealth unit's bottom line. Even though the client holdings drove higher advisory fees contributing to a 12% increase in asset-based fees and a 6% growth in revenue, net income ticked down 1%. The unit generated $484 million on $3.86 billion in revenue.
Remark
Company officials anticipated the slipping net interest income as an "expected decline" across the megabank's business that holdings such as investment advisory assets are offsetting over time through their expanding revenue, according to CEO Charlie Scharf.
"Our efforts to transform Wells Fargo were reflected in our second quarter financial performance as diluted earnings per common share grew from both the first quarter and a year ago," Scharf said in a statement. "The investments we have been making allowed us to take advantage of the market activity in the quarter with strong performance in investment advisory, trading and investment banking fees."
