Pershing’s Q4 revenue falls due to exits and interest rates

Pershing raked in $161B in in net new assets despite big clients’ exits

January 19, 2022 3:23 PM

Despite losing business from recruiting and M&A deals last year, one of the largest custodians reeled in a record amount of net new assets.

BNY Mellon’s Pershing added $161 billion in net new assets for 2021, even after LPL Financial made inroads into Pershing’s client base by acquiring Waddell & Reed’s wealth manager, and despite other firms’ giant recruiting grabs in the bank and credit union channel, the company said as part of disclosing its earnings on Jan. 18. In fact, after dividing the megabank’s largest segment into two units, the company updated prior earnings statements with an additional $34 billion in net new assets that didn’t appear in its guidance for the previous four quarters.

Beginning with the new segments that it launched in early December, BNY Mellon started “reporting dividends and interest in our net new asset flows numbers to be more comparable to how peers report their net new flows,” spokeswoman Erin Smith said in an email. While the company has acknowledged that wealth managers have left Pershing for other custodians, Smith declined to identify them because of a company policy against discussing specific clients.

Regardless, in an earnings call with analysts after the company’s earnings announcement, CEO Todd Gibbons pointed out that Pershing “continues to grow active clearing accounts in the mid-single digits despite the headwind of deconverting a couple of large clients in the second half of the year,” according to a transcript by the website Seeking Alpha.

“Growth has been notably broad-based across broker-dealers and registered investment advisors,” Gibbons said. “Clients have told us numerous times that our ability to bring broker-dealer and RIA solutions together as one is a real differentiator, and we continue to benefit from our uniquely unconflicted role in the marketplace as we don't compete with our clients.”

To see the key takeaways from the earnings announcement and call, scroll down our slideshow. For coverage of Pershing’s prior quarterly earnings, click here.

Net new assets

The custodian took in $69 billion in net new assets to its U.S. platform in the fourth quarter, along with higher updated figures for the prior four quarters representing $34 billion in incoming accounts from net cash deposits and securities transfers, including interest and dividends. For the full year, Pershing’s net new assets jumped by 39% in 2021, or $45 billion.

Assets under custody or administration

Pershing’s custodial assets ticked up by 4% year-over-year to $2.6 trillion in the fourth quarter. Average active clearing accounts surged by 5% to 7.3 million. For BNY Mellon Wealth Management, client assets rose by 12% to $321 billion. Across the bank’s wealth and asset manager, assets under management climbed 10% to $2.43 trillion.

Company’s new segments

Starting with the fourth quarter, BNY Mellon broke apart its largest division, Investment Services, into two smaller ones called Security Services and Market and Wealth Services, Chief Financial Officer Emily Portney noted in her prepared remarks. BNY’s third unit, Investment and Wealth Management, remains the same. In terms of revenue, Pershing represents the biggest line of business in the Market and Wealth Services unit at 47%. “We made this change to increase the visibility of some of our most differentiated businesses to better align our reporting with how we already manage the firm and to provide additional granularity for all of our stakeholders to better track our performance against our strategy,” Portney said.

Pershing revenue

The custodian’s investment services fees and overall revenue each slipped 2% year-over-year to $412 million and $553 million, respectively. In addition to the impact of lost business almost certainly relating to LPL Financial’s acquisition of Waddell & Reed and recruiting of M&T Bank, BMO Harris and CUNA Brokerage, Pershing sustained expenses of $106 million due to the money management fee waivers BNY Mellon is paying clients to help make up for low interest rates. Higher equity values, client balances and transactions offset part of the losses. Excluding the fee waivers, Pershing’s investment services fees grew 3% “as the impact of clients lost earlier in the year was more than offset by growth on the back of higher market values, client balances and activity from existing clients,” Portney said.

BNY Mellon Wealth Management revenue

For BNY Mellon’s wealth manager, revenue expanded by 13% from the year-ago period to $311 million due to rising equity values and interest revenue outpacing losses relating to an acquisition last year. The losses stemmed from BNY selling its $5.5-billion-asset Canadian wealth management business to Guardian Capital Group in the first quarter of 2021.

Earnings

For the quarter in the Market and Wealth Services segment, pretax income of $502 million on revenue of $1.17 billion, a margin of 43%. Profit increased 4% year-over-year while revenue inched up by 1%. BNY’s Investment and Wealth Management unit earned pretax profit of $278 million on revenue of $1.02 billion for a margin of 27%. Its income dropped by 11%, while its revenue rose 3%.

Pershing X and organic growth

An analyst asked Gibbons about sources of organic growth across the company moving into the future. In addition to other current programs at BNY, he cited investments in technology for its wealth manager, Pershing’s recent acquisition of Optimal Asset Management and the custodian’s new turnkey asset management and technology platform. Pershing X is “a significant multiyear investment that we are making in our Pershing platform, specifically on the advisors, to simplify and make the advisory function much more productive for our clients,” Gibbons said, according to Seeking Alpha. “We made an acquisition of a direct indexing firm in the quarter. We decided to buy rather than build for speed to the market. And that group is going to be able to tailor portfolios and provide tax optimization down to the individual level. That hasn't started yet. So that will start probably by the end of this year, and we'll be continuing to invest. So we see that not as a 2022 event, but as 2023 and 2024.”