PREVIEW-Nervous clients mean tough 3rd qtr for brokerages

* Brokerages report Q3 results over next two weeks

* Tough quarter as clients stayed out of market

* Firms trying to boost revenue from each adviser

By Helen Kearney

NEW YORK, Oct 18 (BestGrowthStock) – U.S. brokerages suffered
through a difficult third quarter marked by lackluster customer
trading, lofty recruiting expenses and anxious clients clinging
to conservative investments that are less lucrative for Wall
Street.

Bank of America Corp (BAC.N: ) kicks off the wealth
management earnings season on Tuesday when it posts Merrill
Lynch results, followed by Morgan Stanley Smith Barney the next
day. Based on reported trading activity and wild swings in the
financial market, analysts are not getting their hopes up.

“It’s been a tough quarter all around,” said Steve
Stelmach, a brokerage analyst at FBR Capital Markets.
“Investors recognize that and their expectations are low.”

Analysts are keen to see what progress has been made at
Morgan Stanley Smith Barney (MS.N: ), as it melds two of Wall
Street’s largest brokerages, and Merrill Lynch, where the
once-independent Thundering Herd is integrated with Bank of
America’s consumer and corporate banking businesses.

Retail investors stung by years of losses stayed on the
sidelines in the third quarter, choosing to keep their money
largely in cash or short-term bonds. These investments provide
little revenue for brokerage firms.

Money moved out of equity mutual funds every week during
the quarter, the Investment Company Institute said.

Charles Schwab Corp (SCHW.N: ), one of the largest U.S.
brokerages, reported a 24 percent drop in third-quarter trading
revenue as clients steered clear of the market.

“Perhaps more important than the third quarter was the weak
client activity in September,” Bernstein Research analyst Brad
Hintz said of Schwab’s results in a client note.

Investors usually jump back into the market after the U.S.
Labor Day holiday in early September, which marks the end of
the U.S. summer vacation season. This year, Hintz said, “both
(asset) flows and trading was flat in September versus August,
a sign that retail clients remain paralyzed.”

Further undermining confidence was the May 6 “flash crash,”
when the Dow Jones industrial average plunged nearly 1,000
points in a matter of minutes as computer-driven trading sent
shares reeling for no apparent reason.

Morgan Stanley in July scaled back the asset and profit
targets laid out for Morgan Stanley Smith Barney in February.
The unit, a joint venture between Morgan Stanley and Citigroup
(C.N: ), reported $5.5 billion of second-quarter net
withdrawals.

“Implicit in the targets was a better market environment,”
said FBR’s Stelmach.

Across Wall Street, brokerages also found it more difficult
and more expensive to expand through recruiting, a necessary
evil to quickly attract more assets and increase revenue.

During the summer, Morgan Stanley offered adviser recruits
an extra 20 percent cash bonus if they could transfer half of
their assets to Morgan Stanley by the end of the third quarter.
The firm recently extended the offer until the end of the
year.

Merrill Lynch has also extended its top recruitment package
to advisers who work at some regional firms. Previously, the
deal was reserved for advisers from the Big 4 brokerages.

Despite such sweeteners, adviser movement has remained
subdued, say recruiters. Most of the industry’s top producers
are tied to their firms by generous retention packages doled
out in the wake of the 2008 financial crisis.

“I don’t think we’ll see a big jump,” said Scott Smith, a
research analyst at Cerulli Associates. “I think the
(brokerages) are making an aggressive effort just to tread
water.”

Indeed, if a firm boosts headcount significantly while
recruiting deals are so rich, investors may be concerned the
firm is paying too much, said Stelmach.

In the second quarter, UBS said it was still feeling the
after-effects of massive recruitment packages the firm offered
in late 2008 and early 2009. In the third quarter, UBS Wealth
Management Americas paid out $1.04 for every dollar of revenue
it took in, prompting a series of cost-cutting measures.
(Reporting by Helen Kearney; editing by John Wallace)

PREVIEW-Nervous clients mean tough 3rd qtr for brokerages