How Will Bank of America Be Affected If Wealth Advisor Exodus Continues?

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Bank of America

Bank of America recently lost a team of wealth advisors managing about $1 billion in client assets, as they quit the bank’s wealth management unit to set up an independent wealth management firm. This development is the latest in the ongoing trend of advisors at the brokerage units of diversified banking giants choosing to work as independent advisors, as this allows them to offer clients a wider range of investment products (without the restrictions that apply when they are working at banks). Additionally, this can also free them up from having to cross-sell products from the bank’s other divisions, such as credit cards and mortgages, though cross-selling products can contribute a significant portion of their variable compensation.

Understandably, the attrition rate has been highest among the successful wealth advisors at the banks. As these advisors have sizable client bases that often switch out of the banks’ wealth management units with the advisor, the trend could have a material impact on the share price of banks with large wealth management divisions – most notably Bank of America, Morgan Stanley and UBS.

To answer the question of how a reduction in the number of wealth advisors at Bank of America could affect its share price, we created an interactive model for the bank. Our detailed analysis indicates that in a scenario where Bank of America’s wealth advisor headcount remains at the 2017 level of 17,355 in the near term, versus our base case forecast of a modest increase, the bank’s shares could potentially lose as much as 7% of their value.

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Base Case Price Estimate Of $32 For Bank of America’s Shares

Our base case scenario is based on our forecasts for the following metrics:

  • Number of Wealth Advisors: Bank of America reported 17,355 wealth advisors on its payroll at the end of 2017 – representing 3% growth compared to the figure of 16,820 at the end of 2016. As a part of our base case scenario, we assume that the growth rate will remain constant for 2018 – indicating an increase in the headcount to 17,900 by the end of this year.
  • Average Client Balances Per Advisor: This represents the average value of client assets managed by an advisor, and we arrive at this figure by dividing the total client balances for Bank of America’s wealth management division at the end of a year by the headcount. This figure has increased steadily from $147 million in 2015 to $159 million in 2017, and we expect it to increase to $168 million by the end of 2018 under our base case.
  • Revenues as % of Client Balances: This represents Bank of America’s wealth management revenues as a percentage of its client balances, and has declined from 0.73% in 2015 to below 0.68% in 2017. We expect it to be 0.68% in 2018 primarily because an improved interest rate environment should arrest the declining trend.

  • Bank of America’s Other Revenues: This represents the total revenues from all of Bank of America’s operating divisions excluding Wealth Management. We expect it to be $73.5 billion in 2018, as a strong economic outlook coupled with interest margin gains should boost retail and commercial banking revenues. Taken together with the wealth management revenues as calculated above, this gives us our forecast for Bank of America’s total revenues (as shown in the chart below)
  • Bank of America’s Income Margin: We expect Bank of America’s income margin to jump from ~19% over recent years to 27% in 2018 primarily because of the impact of lower corporate taxes under the new tax act. The bank’s ongoing cost-cutting efforts will also have a positive impact on margins for the year.

Taken together with the bank’s forward P/E ratio of 13, the EPS estimate of $2.46 obtained above translates to a fair value of $32 for Bank of America’s shares.

Price Estimate Falls To $30 For A Scenario Where Headcount Stagnates

For our downside scenario, we assume that the ongoing trend of successful advisors leaving the bank will be offset by new advisors hired over the year – resulting in the headcount stagnating. Under this scenario, our estimates for the key metrics detailed above change as follows:

  • Number of Wealth Advisors: As we detailed above, we expect this figure to remain at the figure of 17,355 seen at the end of 2017
  • Average Client Balances per Advisor: As successful wealth managers quit and take high-net-worth clients with them, the average client balance per advisor could be under pressure. Because of this, we forecast this figure to increase only marginally from $159 million in 2017 to $160 million in 2018 (compared to $168 million for the base case)
  • Revenues as % of Client Balances: As Bank of America would likely have to cut fees to retain its client base in this downside scenario, this figure could continue to decline to 0.66% in 2018 (instead of 0.68% under the base case).

  • Bank of America’s Income Margin: A reduction in wealth management fees and potentially higher compensation expenses to retain wealth advisors would have a negative impact on the bank’s income margin figure. Because of this, we estimate a reduction in income margin from 27% in 2018 under the base case to 26% under the alternative scenario.

As shown here, the EPS forecast for 2018 falls from $2.46 under the base case to $2.31 for the alternative scenario. This results in a price estimate of about $30 under the scenario where the advisor headcount stagnates – a decline of 7% from our base case figure of $32.

Disagree with our forecasts? Feel free to arrive at your own estimates for Bank of America by making changes to our dashboard.

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