Fiduciary rule forced Stifel's hand to sell IBD, CEO says
Stifel offloaded the IBD it bought last year in anticipation of the Department of Labor's fiduciary rule, CEO Ron Kruszewski said.
The company, which reported falling profits as part of its second quarter earnings, sold the independent broker-dealer it acquired as part of its purchase of Sterne Agee, a Birmingham, Ala.-based brokerage and investment bank.
"I think the DoL rule has a disproportionate impact on the independent business, and that affected our decision-making," Kruszewski told analysts Tuesday during a conference call.
Stifel bought Sterne Agee for $150 million last year, but sold its correspondent clearing and independent adviser business for approximately $50 million, according to the company. Leaving with the unit are about 540 independent advisers managing approximately $11 billion in assets.
Kruszewski said that the regulatory landscape changed over the past year, and that the company, which also has about 2,000 employee advisers, reevaluated its operations.
"The only thing I learned from the transaction [to buy Barclays' U.S. wealth management unit] is that I would do it again," Stifel CEO Ron Kruszewski said.
"If a business doesn't fit our core business, we'll do what we have done in the past and divest ourselves it," he said.
The discourse was prompted by an analyst who asked what Kruszewski had learned from his recent acquisitions, which included Barclays' U.S. wealth management unit.
The chief executive said he was happy with the Barclays deal, completed last November, and which Kruszewski described as a "great transaction." That deal brought over more than 100 elite advisers, about half of the total adviser force at the unit.
"The only thing I learned from the transaction is that I would do it again," he said.
Stifel's brokerage business recorded higher revenues for the second quarter, but was overshadowed by a 53% year-over-year drop in companywide profits.
Kruszewski said he was happy with Stifel's performance despite "less than ideal market conditions."
Stifel's wealth management revenues rose 12.4% to $386 million. Total noninterest revenues for the unit rose at a slightly higher pace, increasing 12.7% to $280 million. Pretax profits grew 11.8% to $105 million.
Client assets grew to $237 million from $190 million for the year-ago period, a 24.9% increase. However, it was only up about $5 million, or 2.4%, from the prior quarter. Those figures include assets that were sold in July as part of the sale of the Sterne Agee independent brokerage business.
When asked by analysts about how the company was preparing for the DoL rule, Kruszewski said he was confident in the firm's plans to adapt to the new regulation.
"We're in contact with other businesses and more lawyers than I can indicate. … We do have a plan that will provide our clients and advisers the ability to properly navigate this rule when it is required to be done so, which is in April," Kruszewski said, declining to specify further.
Companywide, expenses mushroomed during the second quarter, outpacing growth in revenues, the firm reported. Total noninterest expenses rose 13.7% while net revenues rose 9.1%, according to the firm. Profits dropped to $9.7 million from $20.8 million for the year-ago period.
The St. Louis-based company reported earnings per share of 15 cents, down from 31 cents.
On the earnings call, Kruszewski reiterated that he was happy with Stifel's results despite recent market conditions, saying that the core business remained strong.
"Our shares remain meaningfully undervalued," the chief executive said.