Editor’s Note: This is Part 1 of a three-part series that examines the wirehouses’ increasing reliance on client loans to help boost their profitability.

Merrill Lynch, Morgan Stanley, UBS and Wells Fargo want clients to take out more loans — including margin and customized loans — and in recent months have expressed a willingness to widen what’s acceptable as collateral.

In 2019, each of those wirehouses succeeded in increasing their client loan balances.

Morgan Stanley led the pack in terms of growth, increasing client loans 8.4% to $90 billion in 2019 from the prior year. Bank of America’s Merrill Lynch came in second with a 7.3% increase to $177 billion. UBS Global Wealth Management came in third with a 2.8% rise to $179 billion. And finally, Wells Fargo Wealth Management followed with a 2.7% rise to $77 billion.

“Many of our richest clients have wealth in illiquid assets and require help to unlock [their] potential through lending and liquidity management products.”
Sergio Ermotti
UBS

Scroll down to see the scorecard of the wirehouse's client loans in the past two years.

Top management at those wirehouses want to see those loans — which boost revenues and add to the stickiness of the relationships with clients — to swell this year.

In October last year, Morgan Stanley CEO James Gorman told stock market analysts the “continued growth of our loan portfolios” is one of several “exciting opportunities that remain in our business.”

Increasing client loans “is really a big focus for us in terms of building a franchise over time,” a senior Merrill Lynch Wealth Management executive told reporters in January.

“There’s no question if an advisor’s firm is more interested in compensating their employees and their advisors based on the products that they sell, that conflict is going to be there.”
Devin Ekberg
Investments & Wealth Institute

“Many of our richest clients have wealth in illiquid assets and require help to unlock [their] potential through lending and liquidity management products,” UBS CEO Sergio Ermotti told analysts in January.

UBS is “expanding acceptable collaterals types” and aims to raise client loans by “around $20 billion a year from 2020 to 2022,” Ermotti said.

Client loans have also commanded center stage during planning sessions at Goldman Sachs, which recently shared its wealth management ambitions. The firm’s $750 million cash acquisition of United Capital closed last year.

“A decade ago, less than 1% of our U.S. wealth clients had a loan from us. Today that number stands at 27%,” Eric Lane, global co-head of Goldman’s consumer and investment management division, told reporters and analysts in January.

Encouraging FA clients to increase loans raises conflict of interest questions, however.

Potential conflicts could arise when employers tie compensation to loan revenues, says Devin Ekberg, chief learning officer at Investments & Wealth Institute, a standards-setting and training organization for financial advisors.

“There’s no question if an advisor’s firm is more interested in compensating their employees and their advisors based on the products that they sell, that conflict is going to be there,” Ekberg says.

“That’s why the government has moved closer to the direction of trying to regulate that conflict. And the big question is, well, is disclosing that conflict enough or do you have to take steps to mitigate those conflicts? And that’s a big discussion in the industry today,” he adds.

Tomorrow, Part 2 of the series: Wirehouse Tactics in Boosting Client Loans Under Scrutiny

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