Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How Bank of America Is Winning the Wealth Management Race
Transcript
- Lucas: You know, Luna, everyone's been watching Apple and NVIDIA lately — and for good reason, both are up big this week. But I want to talk about a stock that quietly outperformed most of the S&P 500 this week without any flashy headlines. Luna: I'm guessing you mean Bank of America, ticker symbol b a c? It's up about three percent in the past five days, which is better than Alphabet, Meta, and Tesla. Lucas: Exactly. And it's not just this week. Year-to-date, BofA is up roughly fifteen percent, slightly ahead of JPMorgan. But what's really interesting is the driver. It's not net interest income — the classic way banks make money. It's wealth management. Luna: That's a shift. I think of Bank of America as a consumer bank first. But they've been quietly building this since the Merrill Lynch acquisition in 2009, right? Lucas: That's the throughline. The Merrill deal was controversial at the time — BofA bought it during the financial crisis for about fifty billion dollars, and there were big questions about culture clash. But fifteen years later, it's arguably the best acquisition in banking history. Today, the wealth management division — which includes Merrill and the U.S. Trust private bank — generates about eighteen billion dollars in annual revenue, which is roughly a quarter of the bank's total. But here's the kicker: it contributes more than a third of pre-tax profit because the margins are so high. Luna: So higher margin than lending? That's surprising. I'd assume lending is the core profit center. Lucas: It used to be. But think about it — wealth management revenue is primarily fee-based. They charge a percentage of assets under management, typically somewhere between fifty and a hundred basis points. When the market goes up, their revenue goes up automatically. When the market goes down, clients tend to stay put because they're long-term. It's a much more stable revenue stream than loan interest, which is sensitive to the economy and credit losses. Luna: And with the S&P 500 at seventy-four fifty-eight, up from about sixty-eight hundred at the start of the year, that's a big tailwind. Their fee-based assets must be growing nicely. Lucas: They are. In the most recent quarter, wealth management assets under management grew twelve percent year-over-year to about one point four trillion dollars. And that's just the managed part. Total client balances, including brokerage and deposits, are over three trillion. The real value is the stickiness. BofA estimates that the average relationship lasts over a decade, and clients with over a million dollars in investable assets rarely leave. Luna: That makes sense. Once you have a financial advisor who knows your family, your tax situation, your estate plan, switching is a huge hassle. It's almost like a subscription business, but with much higher switching costs. Lucas: Exactly. And BofA has been adding advisors. They've grown the Merrill Lynch advisor headcount by about two percent annually for the past few years, but more importantly, they've improved productivity. The average advisor generates about one point one million dollars in annual revenue, up from nine hundred thousand five years ago. That's compound growth of about four percent per advisor — and that's before market appreciation. Luna: So how does this compare to JPMorgan? They also have a big wealth business, and their stock is up two percent this week. Lucas: JPMorgan's wealth management is larger in total assets — about four point five trillion in client assets across their private bank and the J.P. Morgan Self-Directed platform. But BofA has a more concentrated focus on the high-net-worth and ultra-high-net-worth segments. The average Merrill client has about five hundred thousand dollars in assets; the average U.S. Trust client is over five million. JPMorgan has a broader mix, including the mass affluent through their Chase brand. So BofA's margins are actually slightly higher. Luna: And what about the regional banks? They've been struggling with deposit costs and commercial real estate exposure. BofA seems to have a moat they don't. Lucas: That's the key point. Regional banks like KeyCorp or Huntington have net interest margins that are highly sensitive to the Fed's rate decisions. When the Fed cuts rates, their margins shrink. BofA, because of the wealth management revenue, is much less rate-sensitive. In fact, the company's own filings show that a one percentage point change in interest rates affects net interest income by about three billion dollars, but the wealth management revenue barely budges. Luna: And speaking of the Fed, Dallas Fed President Logan called for 'modestly' higher rates this week. If rates stay higher for longer, that's actually good for BofA's lending business, but even if they eventually cut, the wealth management cushion absorbs the blow. Lucas: Right. That's the structural advantage. It's why BofA's return on tangible common equity is consistently above fifteen percent, while many regionals are below twelve. And it's why I think the stock deserves a higher multiple than the current twelve times forward earnings. Luna: That's a good point. I want to come back to valuation in a second. But first, I've been thinking about something you said earlier about the fee-based revenue being like a subscription. It reminds me of how we support this show. Lucas: Yeah, listeners like you are the reason we can keep making episodes without sponsors. If you get value from these conversations, you can support us at buy me a coffee dot com slash fexingo. It's a simple way to help us stay independent. Luna: And it really does make a difference. We don't have to tailor anything to advertisers. We can drill into things like Bank of America's wealth management margins without worrying about offending a sponsor. Lucas: Exactly. So back to valuation — at twelve times earnings, BofA is cheaper than JPMorgan at about thirteen times. But BofA has a higher return on equity and a more diversified revenue stream. The market is pricing in some risk — maybe concerns about commercial real estate or consumer credit — but the wealth management division is essentially a high-margin, low-risk annuity. If you strip that out, the rest of the bank is trading at maybe eight times earnings. Luna: So you're saying it's a bargain. But what could go wrong? There's always a catch. Lucas: The biggest risk is a severe bear market. If the S&P 500 drops twenty percent, wealth management revenue would take a hit because fee-based revenue is tied to asset values. But the revenue would only drop about fifteen to twenty percent, and costs would be cut too. It's not catastrophic. The bigger risk is regulation — the Fed might eventually impose stricter capital requirements on large banks, which would reduce the return on equity. But even then, BofA's wealth management business would still be a cash generator. Luna: And what about competition from fintechs? Platforms like Robinhood or Wealthfront are targeting younger, less affluent clients. Could they eventually move upmarket? Lucas: They could, but it's hard. High-net-worth clients want human advice for complex things like tax planning, estate law, and concentrated stock positions. Robinhood isn't going to help you with a ten million dollar concentrated stock position and a charitable remainder trust. That's Merrill's sweet spot. And BofA has been investing in digital tools for advisors — they have a platform called Merrill Lynch Wealth Management, which uses AI to flag tax-loss harvesting opportunities and rebalancing needs. So they're not ignoring technology. Luna: So for a concentrated portfolio, would you choose BofA over a tech stock right now? The S&P 500 is up, but tech seems to be taking a breather. Lucas: I think BofA is a great core holding. It's not going to triple in a year like some AI stocks, but it offers steady compounding with a dividend yield of about two point three percent. Over the past five years, BofA has compounded at about twelve percent annually, including dividends. That's competitive with the S&P 500, but with lower volatility. And in a period where rates are uncertain and tech valuations are stretched, that's appealing. Luna: It also helps that the CEO, Brian Moynihan, has been there since 2010. Leadership stability matters in banking. Lucas: Absolutely. He's one of the most underrated CEOs in banking. He's never had a scandal, he's consistently delivered on cost-cutting and efficiency, and he's built the wealth management franchise into a fortress. When he eventually steps down, that could be a risk, but for now, it's a strength. Luna: One last question — how does BofA's wealth management compare to Morgan Stanley's? They also have a big wealth business after the E-Trade acquisition. Lucas: Morgan Stanley is more focused on the ultra-high-net-worth and institutional space, and they have a bigger investment banking arm. Their wealth management margins are actually a bit higher, but they also have more exposure to trading revenue, which is volatile. BofA is more balanced. If you want a pure play on wealth management with a stable deposit base, BofA is the choice. Luna: Alright, I'm convinced. I'll put it on my watchlist. Thanks, Lucas. Lucas: Happy to dig into it. Next time, maybe we'll look at a wealth management firm that's pure play, like T. Rowe Price or BlackRock. There's a lot to unpack there too.