Bank of America Corporation (BAC) Earnings Call Transcript & Summary

Here with Andy Sieg, President of Merrill Lynch Wealth Management; and Katy Knox, President of Bank of America Private Bank. Andy and Katy, thank you so much for joining me this morning.

Hey, Betsy. Thank you very much.

Thank you, Betsy.

So Andy and Katy, you're going to be going through a brief slide presentation which will be viewer-driven. And then we're going to move into Q&A. Just so everybody on the webcast knows, Andy and Katy run, in Guam, a business that delivered 22% of BofA's revenues in 2020, $18.5 billion, against $3 trillion in average client assets. And as of 1Q '21, the client assets have grown to $3.5 trillion, clocking in an impressive 30% growth rate. So we look forward to hearing more about how you've been able to accomplish this. Thanks so much.

Hey, Betsy, thank you very much. Good morning, everyone. Katy and I are going to go back and forth here, page to page. And just to kick us off, Betsy, it's wonderful to be able to join the conference this morning. And at Bank of America, we're very proud of this leading Wealth Management franchise, as you described. In our view, this is a franchise that's quite differentiated on multiple dimensions. We're going to try to call that out over the slides ahead; and also has extremely strong growth prospects, not just over the quarters ahead, but over the decade ahead. 2020 was a tough year. The 2020s, we believe, will be a phenomenal decade for Wealth Management. Levels of wealth in the U.S. and around the world are projected to increase dramatically. Uncertainty is out there. And so we have some conviction that clients need our help, particularly high net worth and ultra-high net worth clients. And together, this really equates to a bull market for advice that we think we're well positioned for. If you turn -- I know everyone's moving their slides themselves, so if we turn to the first slide. Scale is an important attribute of successful wealth managers in this environment, and this business has it. If we actually add to the businesses that Katy and I run, our consumer investments business, this is Merrill Edge. Collectively, Bank of America's presence in wealth management is nearly $4 trillion across those 3 businesses, nearly 20,000 advisors. And the business is both a high-touch business as well as a high-tech business. As you hear -- see here on the slide, there's tremendous talent in this business. Our advisor force receives accolades from all sorts of third parties. It's been great to see in recent years, we've actually extended our lead on many competitors on these surveys. And from a digital perspective, the investments that Bank of America has been making in technology, and specifically behind our Wealth Management business, have paid off enormously. The business has moved forward, we like to say, probably 5 years in terms of our progress, client uptake of our digital platforms. But we're not letting up, the investments are going to continue. And we're excited about capabilities being introduced right now, such as our new digital client onboarding engine, which is going to help clients engage with us digitally right from the beginning of their relationship. Flipping to Page 2. You know these numbers very well, the financial profile of the business. I would just point out a couple of things. First, this is a business with consistently high returns on capital. It's why Bank of America loves the business and obviously why investors focus on this business. Revenue growth has been strong in the business, and we've seen profit margins increasing. Of course, our net income story, like many financial institutions, was interrupted during 2020. But even in the face of the pandemic, as you'll see in the middle of the page, the business delivered over $3 billion of net income and a 22% pretax margin. We see -- you saw in the first quarter, those results are bouncing back strongly, and we anticipate that continuing into the subsequent quarters in '21. Katy, let me turn it to you.

All right, Andy. Thank you. As Andy mentioned, on the next slide, we are really well positioned to grow our platform and really leverage the breadth and scale of the entire company and platform. We utilize best-in-class banking platform, leading-edge capabilities to really help our clients to transact on a daily basis. And what that's done is really helped us to expand those primary relationships with our clients. And in parallel, as Andy mentioned, we're leveraging all of the enterprise digital capabilities to further differentiate. You'll hear us say high-tech, high-touch several times today, and that experience really is across the entire continuum. And the results have really allowed us to take a step back and more permanently adapt our business model to take advantage of technology and really drive productivity. And this just represents the continued transformation of the business that we've talked about. The pandemic certainly accelerated our efforts in many ways, serving clients virtually. Certainly, the digital adoption that we'll talk more about, but also our work around operational excellence and making sure that we're driving out those manual, time-consuming processes across both of our platforms. And around people, we've invested in our programs and initiatives to really capitalize on the culture. And really not dependent on competitive recruiting, we're capitalizing on homegrown talent, and that has been very successful for us. And obviously, as Andy recently announced, the advisor development program, which just further strengthens the integration across the entire continuum. If we turn to the next slide, we will talk a little bit about that continuum. And we are uniquely positioned here for growth really across all points of the wealth continuum. We work across consumer, wealth management, to serve clients at every stage of their life but also address all of their priorities. Further, we meet the clients' needs across the channel around investment solutions, self-directed, digital advice, full-service advisor and team-based advisor. And we maintain a leadership position in all of those segments. And just remain focused on capturing the significant growth opportunity both internally and externally. And as you can see, there is quite an opportunity. We also leverage our internal local market organization, which is led by our market presidents, and that allows us to do client planning really at the local level in each of our individual markets. So we work in close partnership across those 90 markets with all of our market presidents. And it's really, for us, a key competitive advantage. We'll turn to the next slide. And Andy, maybe you can just take us through the household growth, and then I'll touch on some of the referral activity.

Sure. This is Page 6. And really on the page are 2 of these points that we think make this business quite distinctive in the market. And just I'm going to hit the left side of the page, which is when you think about Brian's strategy overall of responsible growth. Where that really comes home in Wealth Management is the ability to organically drive household creation. It's gross household acquisition net of households that you're losing. And as you see on the chart on the page, back in 2016, 2017, net household growth was quite limited in our Wealth Management business. And across the Merrill franchise, for example, we were netting, in some cases, 0.5 households per year net per financial advisor, which is obviously not particularly strong performance in terms of growth. We've seen that net household increase -- accelerate dramatically in recent years. This is captured on the slide. This is a level of organic growth which is outpacing most all of our peers. We continue to think there's a lot of upside to these numbers as we look out over our 3-year plan. And interestingly, even in 2020, in a year where we were interacting exclusively with clients digitally or over the phone, we were seeing vastly stronger levels of net household acquisition than we were experiencing in 2016, 2017. And that's the reason behind that. We can talk about it during Q&A. Sure, it's a common notion of incentives and the way we've designed financial advisor compensation, but it's also the capabilities of Bank of America that we think make us distinctive to clients as well as a culture of responsible growth, which is very active and alive in this business. Katy?

Sure. On the right side of the page, you'll see the referral activity. And as you can see, we have very strong activity across the company. And we really focus on business integration across consumer, Global Banking, Markets and then obviously in Wealth Management. The chart on the right really shows you that 5-year growth trajectory as the integration efforts have matured over that period of time. And we really drive that referral activity, as I mentioned, at the local market level really through our client-planning activities and also through the line of business planning sessions. I've personally been in all the commercial businesses, in consumer and wealth management. So I really know how important it is to make sure we have those disciplined, consistent routines planning around clients. And that really is the expansion strategy as well as the acquisition strategy working across the company. And the results really are achieved at that local market level in collaboration with all of our peers, our market execs and our market presidents. And if you look at just last year, we delivered over 300,000 referrals to our line of business partners, and we're on track to continue that pace and exceed that. And that was up 28% year-over-year. So good progress, but we won't stop there. We'll continue with that discipline and really driving that business integration across all of our businesses.

And on Page 7, you really see how these activities are driving the profile of the business volumes, and even more largely, the transformation of this business. If you think about wealth management businesses looked like a generation ago, certainly, and this is far from the old line transactional brokerage business. This is a business now built on very solid, recurring long-term revenue streams. We've seen a strong increase in our fee-based assets, which as you see that topped $1.4 trillion. Our loan growth and deposit growth have been very strong. And if you just isolate on our Wealth Management business alone, we're a top 15 U.S. bank in loan volumes and a top 10 U.S. bank in terms of deposits. Particularly on the loan side, you think about the Merrill franchise, we haven't had the benefit of some of the lending capabilities that Katy and the Private Bank have had for a long time. And so as we're showing these capabilities to more clients, we're very optimistic about what can happen in terms of future loan growth. Katy?

Okay. On the next slide, we'll talk a little bit about our digital road map. We continue to invest here really long term around innovation and digital enhancements for our clients. As I mentioned, the pandemic accelerated our engagement. It hit an all-time high of 80%, which by the way is the highest in the company. And we'll continue to drive that adoption, but more importantly, that engagement. And there's really been 3 drivers of focus that we've dedicated our actions around. One is the engagement. So that is really enterprise-wide, educating clients and helping them to leverage the technology, the platform. That's a real key driver for us around what we call the branded client experience. And as you can see from this slide, the login growth is greater than the user growth, showing that clients are really using more and more of our capabilities once they log on. And so our efforts are really taking hold. The second area of focus is really around collaboration and advisor experience. And we use a variety of digital capabilities to really deliver information and service better and faster and more secure. And as you can see from the results in the second column there, we're creating an increased productivity really for our advisors, but across the entire team. And then the third area is around transactions. So think about that around self-service, just making it easy for our clients to interact with us, and more importantly, to really leverage best-in-class enterprise capabilities and deliver them across Wealth Management and put it in the hands of our clients. So a great digital experience is faster than having somebody do it for you. And so we're really creating a new value, a new relationship and tremendous engagement with our clients through our digital efforts.

That's great. And this is going to take us to Slide 9, which is our last slide here of the prepared deck, but really a critical one. When you think about where we started, what the 2020s are going to look like and the opportunities for wealth managers in the 2020 to serve high net worth and ultra-high net worth clients, we think a key characteristic of successful wealth management organizations will be the ability to drive growth in their advisor census. We're going to -- this is a digital business, of course, but it's also a high-touch business. So we need to put more advisors on the field in front of clients. And we think one of the very distinctive aspects of this franchise is this focus on organic talent development as well as organic client development. We have, for many years, been out of the advisor recruiting game because we don't think it is a good formula for clients or shareholders or the firm overall. On the left-hand side of the page, we can kind of capture this with the metric around our advisor loans outstanding. These are the loans utilized in a competitive recruiting context. Ours have been in secular decline. Most of our competitors have actually seen those levels of loans increasing in recent quarters because it is a very active recruiting environment right now. We're going to maintain discipline and maintain our focus on investing where we think we should for the long term, which is around developing our own advisors. In recent weeks, we announced an integrated advisor development program. We're very excited about this, because we think we're uniquely positioned to identify future advisor talent while they're still, in many cases, working in other lines of business, particularly within our consumer bank, in our Edge business, where they're already licensed to do securities business and are advising clients and then have an aspiration, over time, to become advisors in the Private Bank or at Merrill. This new program kind of lays out a multiyear path for them to move in that direction. We think this program, as it gains traction, will allow us to drive census growth over the decades ahead. And do so, as I said, in a way that is great for clients, great for shareholders and also is building the kind of culture that we want to have. When we look around the market, see the recruiting that's taking place, one of our principles is that cultures can only be built, they can't be bought. And we're going to stay focused here on building on this tremendously strong Bank of America and Merrill Lynch culture as we put the advisor force of the future in place. And so Betsy, with that, let me -- we'll turn it back to you. I think we stayed almost on time.

No, that's great. We have about 15, 16 minutes left, so I appreciate that. And I do want to let the audience know that if you do have questions, please type them into your browser and we will get to them. I wanted to kick off the questions really on the growth trajectory, and then we'll get into client asset composition and outlook after that. But since we spent a lot of time going through the growth drivers, I thought that would be a good place to start here. Just keying off of what you mentioned just now, Andy, on the approach to advisor recruiting. I just want to make sure I understand how you're thinking about that in terms of where you're looking to take your advisor numbers. What I heard is that your advisor growth is going to be predominantly, if not entirely, driven by an internal movement of people who are licensed and have expressed an interest to move up in their careers. Is that fair? Is there any sort of non-internal that you would consider? And then the second part of that question, is what kind of pace of advisor growth are you looking for? Is it similar to what you've had over the past few years? Is it more of a replacement strategy and flat? Or are you thinking that you should be looking to increase your total advisor count?

Thank you, Betsy. What I think investors should be looking for is low single-digit percentage increases annually in advisor count. We are in a transition period. Obviously, there's been an enormous disruption in all of our lives and in the marketplace. We used that time of disruption to reset around advisor development, I think, in a very strong way. And as this program comes to its fruition, it will be delivering low single-digit increase. If you compare what's going to be happening in the future versus the past from a shareholder perspective, I'd also point out this is going to be much more efficient. Merrill has been long known on The Street for running the largest advisor development program. But when you look at that with a lens of expectations for 2021, it was a very inefficient program. Graduation rates were pretty low. Our success rate of advisors 5 years out was only about 20%. As we've reset the program by more carefully focusing on talent coming in, having a more clear development path, more support in terms of oversight as well as lead development and then the right type of transition plan to become an advisor, we think the success rate in this program can be pushing at an 80% success rate over time. So we'll have more throughput in the program and do so with less investment over time. This will be overwhelmingly internal talent development, but we still maintain flexibility. For example, we see early career advisors that may have started at other firms. They're licensed and trained. They look a lot like individuals that would be in the later stage of our development program. We'll be hiring some of them and bringing them over, but on a salaried program, not a traditional recruiting deal. And then there may be instances where we do want to have select inorganic acquisition of advisor talent. And we would maintain great discipline around that. It could be a market where we have a particular need to accelerate our presence or where we see an extraordinary level of growth happening. We've mentioned, for example, in the state of Florida, given what's been happening in terms of the migration of wealth and the creation of wealth in Florida, there's a possibility there that we may look to add some teams inorganically. But that's very limited and very marginal against the backdrop of a 20,000-advisor business.

Got it. Okay. That's super helpful color, Andy. Katy, what about your approach to building out private bankers?

Betsy, it's very similar to what Andy just articulated. First, we've learned a lot. Over the last 5 years, we've hired 150 advisors in the Private Bank. And really, what the data has shown us is exactly what Andy said, that the internal hires have been really successful: One, cultural fit; and two, their awareness of banking and their training. So that's really the path that we've been on for the last 3 years. Within the Private Bank, we've built out the talent framework. And what that's allowed us to do is really make sure that we have those pathways for every single role. So right now, we have over 100 analysts and associates within the Private Bank in some form of a training program. We have 125 teammates in an advancement program, meaning they're looking to go to the next level. That's what we talk about when we reference pathways. All of that has really been leveraging the framework of what Andy just talked about, the advisor program, so that we don't have to have a separate program. So the focus has been on our younger professionals and making sure they have the training, in-role development and then overall advisor development. And we'll stay on track with another -- we're just at under 500, and we'll go to 525. So very similar growth trajectory. We've also established a program with consumer investments where we have 30 financial solutions advisors working within the Private Bank supporting our teams, and that was Andy's point. They are learning more and more about Wealth Management, about the Private Bank, and they can step into the Private Bank or into the Merrill program. So we feel really well positioned from a talent standpoint, that we have the right framework to develop talent internally.

And obviously, BofA has been expanding branch reach. You already have a great branch footprint, but you have been expanding branch reach. Is that giving you incremental running room? Is there much there that you can leverage?

Well, I mean, I think if our partner, Dean Athanasia, was on the line, he would talk about kind of a particular type of leverage is moving into a state like Ohio where there wasn't much Bank of America consumer bank presence. There's particular leverage because of the Merrill Lynch business' deep roots in Ohio and with high net worth and ultra-high net worth clients in Ohio. So that's a place where we get great reach. We also -- we get leverage from a Wealth Management standpoint by increasingly co-locating advisors in Bank of America financial center locations. And of course then the referral flow back-and-forth that Katy highlighted is very important to us. But when you look at some of the numbers that are in the document, you can see we barely scratched the surface in terms of the potential reach over time. Just to put it into context, 2 numbers that we like to talk about, 1 number is 3 million and one is about 900,000. 3 million are the number of clients with $1 million plus net worth who are customers of Bank of America in the consumer bank, but do no investments with us. 900,000 is just about the total number of high net worth clients between Katy's business and ours. So when you take a step back, I mean, there's 3x the number of customers of the consumer bank who could become wealth management clients as there are in the Wealth Management business today. So that's where we see just great leverage, and I think leverage not again for a quarter, leverage for the decade ahead.

So when you think about the growth drivers, you've got part of it from some increase in either private banker or advisor headcount. You've got some coming from the expansion of wallet with the clients you have already. And then you've got another leg, which is new clients. If you were to think about those 3 drivers, what weighting would you put on each of those as you look out over the next 2 to 3 years?

I mean, a little bit of it's dependent upon the market and economic environment, of course. I mean, in a very buoyant market environment like this, our consolidation opportunity with existing clients has been powerful. But I think over the course of the decade, net client acquisition is probably going to be the largest source of growth. Second, consolidation and then with existing clients deepening, as you said. And then third, of course, kind of delivering on that low single-digit growth of advisors. I think that's -- and of course, we're -- that's being powered by our market president network, our referral network as well. That's helping us deliver both on the client side and the talent side.

Okay. Great. Let's talk a little bit about client asset composition there and then get into the tech after that. On client composition, the assets have grown significantly, as we indicated, both you and I, in the prepared remarks and in your slide deck. Can you tell us -- give us a sense as to where you see cash within the client asset mix today. And where does that sit relative to what you had pre-COVID?

Yes. That's -- I'll take a shot at it and then I'll let Katy talk about it. Very similar across the businesses. But Betsy, it's one interesting point. There's a lot being written right now, of course, around client exposures to the equity market at all-time highs, given the run-up in the equity markets. I think that misses the story because we see our cash levels at all-time highs as well. And so we ended the first quarter, just in the Merrill business, with about $280 billion of client deposits, up from a number closer to $220 billion pre-pandemic. And those numbers have remained -- those deposit levels have remained very constant and upward-trending despite the increase in the markets. What that says to me is there's a lot of cash on the sidelines. And when you think about our business and the size of our business relative to the marketplace, I think it not only tells you where investors are, which is still maintaining some caution, which is as a contrarian, that's a bullish signal, makes me feel like we're not very late stage. And I think if you kind of gross up our kind of excess deposits or uninvested funds right now, that speaks to $1 trillion of buying power that could come into the market over the months ahead when client perspectives of risk do shift more meaningfully. Katy?

No, I would say exactly the same. Similar story on the private bank side. If you look at our deposits, they're up 17%. We've driven a tremendous amount of activity around operating deposits using our GTS franchise, our global treasury management franchise. We saw cash levels across the portfolio pre-pandemic. We saw the increase in the March, April, May time frame. And now we've just dipped below where we were pre-pandemic. But as Andy said, a lot of cash on the sidelines, very, very strong deposit growth as well as overall client balance growth.

We do have a question coming in here on loans. And I think, Andy, you mentioned during your prepared remarks something about not having the same kind of tools in loans that Katy has. Could you dig into that a little bit, explain what you meant by that?

Well, the Private Bank, which grew up as an integral part of Bank of America, in particular, had access to lending against types of collateral that were not a strength of the Merrill Lynch business before it was acquired by Bank of America. So this would be collateral ranging from real estate to card loans to yachts, the ability from a credit perspective to provide unsecured lines of credit to worthy borrowers. We call that structured lending or custom lending capabilities. Today, within the Private Bank, there are $36 billion of outstanding loans along those lines to Private Bank clients. Within the Merrill Lynch business, there's about $17 billion of outstanding loans. When you look at the size of the Private Bank client base, high net worth client base and the Merrill Lynch high net worth client base, that would tell you there's an opportunity over time if we receive -- if we achieve similar penetration levels with our lending products for $50 billion of additional loans to clients of Merrill Lynch. And again, this isn't, again, over the months ahead. This is over the years ahead. But it's a place where, as our Merrill advisors are being more comprehensive in terms of their coverage of our clients and pulling in the capabilities of Bank of America overall, this is an opportunity to step up, dislodge some existing lenders and consolidate relationships with Bank of America.

And Betsy, the other thing that I would add is, and I mentioned it as we were going through the presentation. But when you think about enterprise capabilities, we're able to use the consumer franchise and all of those lending options as well as the commercial franchise. So when Andy is talking about those custom loans, we're actually using that wholesale credit platform to drive growth. And so we feel like we have a tremendous opportunity to continue to grow that part of our business.

Okay. So we have a few minutes left. I'm going to squeeze in 2 more questions. One's on fee rate. Just -- because when someone like in my seat does the math on revenues versus AUM, it looks like the fee rate went down a little bit. Obviously, the revenues are up significantly. Is that just a function of having cash on the sidelines? And maybe you could go into what you think there.

Yes. It's actually more, Betsy. It was a little quirky around the pandemic. We -- it really comes down to what's the timing in terms of when we bill on our investment advisory balances. And so we don't bill every day. Clients would be annoyed if we were pulling fees out of accounts every day. So we bill the first day of the month. We bill for that month's fees based on those asset levels on the first day. When you look, in particular, at a time of volatile markets like kind of the March, April time frame of last year, your end-of-period balances are not really reflective of where you've been billing. So the actual story that's happening -- so you'll see that when you look across multiple quarters, that settles out. The actual story on our investment advisory pricing has been, over the last now 5 or 6 years, about 3 basis points a year of pricing degradation. Interestingly, that rate of pricing decline has slowed a bit in recent quarters. It's been closer to a 2 basis point per year annualized degradation rate. It's a little early, I think, to kind of call whether that -- where the pricing levels are bottoming out. We work every day to ensure we have discipline around pricing and a consistent approach to pricing, and more importantly, that we're showing more and more value to clients so that they feel very good here about the value for the price they pay.

So in closing, just last question for each of you. Andy and Katy, could you give us what your key priorities are here for '21 and '22 as we round out this year and go into next?

Yes. It's really -- I mean, it's really 3 things. It's people, advice and growth. From a people perspective, it's delivering on the talent strategy that we talked about. In particular, we didn't talk about, but the focus on diversity as a commercial imperative in this business remains at the very top of our list. In terms of advice, it's how can we be comprehensive, ensure that we're addressing the full range of needs that our clients have in a way that our competitors can't. And then finally, consistently delivering on that organic growth strategy, organic household acquisition. And showing the marketplace and our advisors that you can grow an advisor practice here at Bank of America unlike anywhere in the market. And I'll leave you with this. We looked back to 2009 recently and just wanted to take a look at how advisor businesses have changed since Bank of America bought Merrill Lynch. When the acquisition happened, there were 1,200 million-dollar plus producers within the Merrill Lynch business. There's now 4,400. There were 14 advisors who produced more than $5 million of annual commissions. Today, it's 185. So by any analysis, this is a powerful platform to serve clients and to build advisor businesses, and that's a key part of this growth story. Katy?

So 3 key areas of focus: Continuing to enhance our platform, investing in digital, obviously, those processes that I talked about through our operational excellence; investing in our people, mentioned all the programs that we have there, obviously, with a lens around diversity and inclusion; and then third, those growth drivers that we talked about. We didn't talk much about some of the wealth and estate planning, but we see tremendous growth there and our philanthropic capabilities, and Andy mentioned on our art services. So Betsy, that's what I would say, really continuing to execute on those growth drivers that we mentioned.

Super. Andy, Katy, thank you so much for joining us this morning. Really appreciate all your insights.

Okay. Thank you for the opportunity. Thank you.

Thank you.

Okay. Now we'll move to the next session.