Wells Fargo’s wealth and investment management business suffered a significant drop in earnings in the fourth quarter of 2019, largely due to higher employee benefits expenses tied to increased deferred compensation plan costs and higher technology spending.
The deferred compensation costs are mostly related to advisors, but all team members who earn in excess of a minimum dollar amount are eligible for the plan, according to spokesperson Shea Leordeanu. And the plans are “primarily market-driven,” she adds.
Specifically, when "the market swings up, increasing the value of assets under management, the value of deferred goes up as well," she says. "The flip is true if the market swings down.”
A reset of the technology strategies for the wealth management business also led to increased spending.
Jonathan Weiss, who became the leader of the wealth management business in 2017, has engaged in “a strategic reassessment of technology projects,” Charles Scharf, Wells Fargo’s new CEO, told analysts during a conference call that followed the release of fourth quarter earnings.
As a result of that reassessment, the company reported $166 million in expenses for technology in the fourth quarter of 2019.
The wealth and investment management segment of the bank’s business includes Wells Fargo Advisors, The Private Bank, Abbot Downing and Wells Fargo Asset Management.
Those units’ revenue rose 3% on-year to $4.1 billion, primarily driven by higher net gains from equity securities and higher brokerage advisory fees. But those gains were largely offset by employee benefits expenses and in part by lower net interest income. Higher operating losses, higher employee benefits expenses, and higher regulatory, risk and technology expenses drove non-interest expenses up 23% on-year to $3.7 billion in the fourth quarter.
When compared to the previous quarter’s results, net income was down by an even bigger 80%. Revenue for the year was down 21%, or $1.1 billion, mainly because the third quarter saw a gain of the same amount for the sale of its Institutional Retirement & Trust business. Non-interest expenses were up 9% on-quarter.
Client assets up, headcount down
Wells Fargo’s retail brokerage business had a banner recruitment year in 2019, according to Leordeanu.
Total wealth and investment management client assets were up 10% to $1.9 trillion in the fourth quarter from the same period in 2018.
Retail brokerage client assets were up 11% to $1.6 trillion in the fourth quarter from the previous year. Advisory client assets were up 18% to $590 billion. In both cases, the increases were attributed mainly to higher market valuations.
Wells Fargo Advisors had its “best recruiting year since 2016 with record productivity among new hires,” according to Leordeanu.
“Our new hires for the year had 40% more in T-12 than we had anticipated,” she says, without elaborating.
Despite the rise in new hires, the total number of brokers at Wells Fargo Advisors fell 3% to 13,512 in the fourth quarter compared with the same quarter in 2018.
“Our decline this quarter was based primarily advisors retiring and leaving the industry. We are optimistic about our recruiting prospects for 2020,” Leordeanu says.
The bank’s overall net income fell 53% to $2.9 billion in the fourth quarter from $6.06 billion the previous year.
“A series of legacy issues meaningfully impacted our results in the quarter. Even excluding the significant items, our results are not as strong as we aspire to. But the strength of the franchise is still evident," says Scharf, who took over as CEO of Wells Fargo three months ago.
Wells Fargo made “terrible mistakes,” Scharf said, in a reference to the bank’s long-running scandals and the ensuing scrutiny from regulators.
Scharf said the bank has “not effectively addressed our shortcomings,” and, as a result, has underperformed.
“We have not yet met our own expectations or the expectations of others. We must do what’s necessary to put these issues behind us,” he noted.
Scharf said he is still reviewing the bank’s individual business units, which will likely lead to further reorganization of management.
“The path to success will be bumpy,” he said.