Amid challenging economic conditions in the second quarter, Stifel Nicolaus was not able to keep pace with its first quarter performance as net revenue fell 6.5% to 375 million and net income dropped 25% from 34.8 million to 26.1 million.

"The operating environment in the second quarter was challenging, especially compared with the strong start to the year," Stifel's chief executive Ron Kruszewski said in a statement. "The headwinds in the equity markets and bond markets, as well as macroeconomic factors affected the industry, our business and client activity."

The global wealth management division at Stifel also took a hit. While net revenue and income increased from second quarter of last year, net revenue fell from 248.3 million to 240 million and net income dropped 11.3% to 61.3 million. The private client group's revenue of $221.0 million was down 5% over the last three months.

"Overall results for the quarter in both global wealth management and the institutional group reflect difficult market conditions but are an improvement year-over-year. The diversity and integration of our business model all besets a challenging period," Kruszewski said during a conference call Wednesday evening.

Stifel attributed its weaker results in the wealth management division to a drop in revenue from commissions and transaction fees as a result of lower trading volumes as well as lower sales credits from investment banking underwritings. Commission revenue fell 3.3% to $127.4 million and revenue from principal transactions dropped 21.2% to $91.6 million.

That was offset by fees from asset management, which rose from $60.8 million to $65.3 million as assets increased. Due in part to market performance and a 4% increase in new accounts, client assets grew by $97 million to $137.9 billion. "Asset management service fees increased due to an increase in total client assets. That was really a result of market performance and inflows," Kruszewski said.

In addition, Stifel's income was affected by continued investment and expansion. The St. Louis-based firm has added 103 financial advisors year to date, 12 this quarter alone.

"Recruiting remains active. We've had some great new hires and will continue to seek opportunities to recruit seasoned advisors," Kruszewski said.

Moreover, the firm opened 12 private client offices so far this year, despite increases in expenses that cut into margins. He compared the situation to 2009 and 2010 when the firm opened around a hundred offices and added 700 employees. In that case, margins fell from 25% to 16% in the private client group before rising back to 26% on greater profit.

"The one thing about Knight, Edward Jones and Stifel and everybody else: it costs so much just to put everything in place, the accounting system, the back office, the HR ladies; all that stuff. But once the market heats up, you've got multiples you can earn past the critical point of covering your costs," John Kozey, senior analyst at Thomson Reuters, said.

According to Kruszewski, future growth will be concentrated on the banking division rather than the broker-dealer.

"The broker-dealer is way under-levered at 2:1, but we are very cautious," Kruszewski said in the conference call. "The funding markets are volatile. Frankly, the ability to fund pure broker-dealers with what happened in the recent years makes it a little bit prohibitive to add leverage in the broker-dealer. On the other to add leverage to the bank, which is what we've been doing, we're funding that with very low-cost deposits, so you'll see the bank continue to grow."

Kruszewski also indicated that the firm had been investigating some underperforming portions of the business in effort to cut costs, but he refused to disclose exactly which areas were being scrutinized. "We are evaluating underperforming businesses and know we have work to do on our non-compensation expenses," he said.

Kruszewski also commented on his firm's most recent investment in Knight Capital, disclosing that the firm had put in $30 million of the total $400 private investment in exchange for 20 million shares at $1.50 per share. He also confirmed that Stifel did not have a board seat at Knight.

"From my perspective, it was both a financial investment that was both attractive, but importantly we participated in an industry solution for Knight who was a major market liquidity provider," Kruszewski said in the conference call.