Last month, I noticed this WSJ article, Merrill's 2012 Pay To Drive Advisers To Richer Clients.
I didn’t think much about it over the holidays, but it started gnawing at me. Perhaps it was reading a draft of Josh Brown’s book, Backstage Wall Street over the weekend that started me thinking about that piece. This may be a little Inside Baseball for those of you who do not work in the industry, but bear with me. It is rather instructive of a certain mindset that has broader implications.
The article notes that Bank of America’s Merrill Lynch division will no longer pay its advisers on business done in new relationships they establish that are under $250k. Previously, the cut off was $100,000 dollars. What this means, quite simply, is that no Merrill adviser is going to pursue such business.
Note that the firm did not say they won’t accept such accounts; they are happy to take them and the 2% fees they generate. What they are saying is that they just won’t pay their employees on these accounts — which amount to 4% of the $2.2 trillion in client assets managed by 15,000 financial advisors.
A quick back of the envelope calculation is that this is $88 billion in assets that are no longer generating fees for employees. That is $1.76 billion is payouts that the bank has just decided to keep for itself, screwing their own employees of their fees. (UPDATE: No it is not; See details below)
I have spoken to a few Merrill employees, and they are livid. This is not policy, they inform me, it is simply a billion dollar theft. A few gents I spoke with are already looking at other shops. Another told me he considers this voiding his employment contract, and is speaking to his attorney about his options. This could end up being a recruitment windfall for Morgan Stanley and UBS.
Regardless, it is yet another example of what happens when incompetent institutions are kept alive by government bailouts, instead of the preferred route of prepackaged bankruptcy reorganization.
I expect two current trends to continue:
1) The exodus of advisors from the big bulge bracket wirehouses towards smaller independent firms; 2) Clients and their assets (regardless of size) will continue to gravitate away from big firms and towards do it yourself discount brokers and independent advisors.
Regardless of the outcome of this foolishness, it is rather telling about the state of Bank of America’s (BAC) finances. A stupid idea this short term and self-destructive can only mean their financial position is even more precarious than I previously believed . . .
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UPDATE: January 9th, 2012 10:12am
Merrill Lynch tells me that the existing accounts are grandfathered — they will continue to be paid on. The new accounts are the problems MER reps have been screaming about.
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Source: Merrill's 2012 Pay To Drive Advisers To Richer Clients Jennifer Cummings WSJ, December 23, 2011 http://blogs.wsj.com/financial-adviser/2011/12/23/merrills-2012-pay-to-drive-advisers-to-richer-clients/
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
Have financial advisors made the vast majority of their clients rich, or just themselves and their firms?
2%?? So…….what kind of returns were these geniuses getting their “clients” for 2%? A “billion dollar theft”, indeed.
[...] Barry on the Merrill Lynch cramdown. (TBP) [...]
Ditto on FAs going away from big firms, but not to Wells, MS and UBS. Those happy hunting grounds are doing the same thing as Merrill to FAs.
There’s another explanation for the change other than BAC’s finances being in danger. Top management may have decided to pay their employees less so they could pay themselves more.
A friend at one of the larger corporations was given the job of laying off enough employees to save $1 million. He was told that the reason for doing this was that the CEO had demanded a extra million dollars for his bonus that year.
Those small accounts can sometimes cost more than they bring in.
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BR: Yes, it varies.
It depends upon the rest of the relationship with other families, the persons growth potential, etc.
So, they are cutting expenses and asking employees (contractors) to do more with less? This has been happening everywhere else in our economy for quite some time. Why the outrage when it happens in the financial sector?
BAC thinks their adding 2 billion to ML’s bottom line. Add to that the 1-3 trillion? in derivative debt/losses they were able to get off of ML’s book and on to the bank’s books and it looks like BAC is prepping ML for a spinoff?
off-topic, but an interesting take on the Greece problem:
http://www.americablog.com/2012/01/what-chase-goldman-sachs-did-to-greece.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Americablog+%28AMERICAblog%29
What was done to Burmingham Alabama (and their water system) was done to Greece (and Italy) via the same big bank interest rate swaps and then betting against them.
I feel for those advisors who have served their clients for years and have long-standing relationships with them – the big banks have trashed most of those relationships – they don’t want the advisors “owning” those relationships.
Well, many of these same disgruntled Merrill Lynch employees had a chance to support a movement whose clear intention was to limit abusive behavior on the part of Wall Street investment firms and to re-think the warped bonus structure of financial industry executives. The movement’s home base was no less a few blocks from Wall Street. The movement even inspired satellite protests all across the country, so even a Merrill Lynch employee located in San Diego, Denver, and Atlanta could play a part.
You can’t make it more convenient that that. I want to feel for these Merrill Lynch representatives. I really do. But I wonder how many of them were decrying the hippie, unwashed masses in Liberty Park when they had a chance to make a difference.
Barry – I’m a big fan but you’ve got your math all wrong. This is not a billion dollar change for the bank…it may be a $50 million change if they are lucky. Most clients who have less than $250k do not have a fee-based relationship with their advisor and therefore are not generating 2% or anything close. They are likely small stock and bond accounts that generated commissions at some point but are not longer doing so. The bulge bracket firms are not making money on these accounts and they are a drain on the advisors time and resources, which is why they are making this change.
The only advisors who should be upset about these changes are those who don’t know how to grow their own businesses. The writing has been on the wall about small accounts for a decade at all of the big firms.
But to suggest that the banks are going to make billions, let alone hundreds of millions, is absurd
“A stupid idea this short term and self-destructive can only mean their financial position is even more precarious than I previously believed”
Exactly. BAC has made some amazingly stupid moves lately to try increasing their revenues. I would not be surprised if they go down before the election. Obama needs to take down at least one of the TBTF institutions before the election so he can show that the financial reforms are working and that he is not just a servant for the TBTF.
Big fan here as well, and one that (fortunately or not) still has his bull riding boots on. This is a shisty move but doesn’t affect my current relationships. Any and ALL that I have under 250k my team will continue to be paid 100% on the fees that are generated. The new 250k rule only pertains to new relationships. And to set the record straight our average fee per account is closer 1% not 2%. As for returns there are several of us who are tactically minded who seek most of their research and strategies externally that have Global Macro portfolios that were up 6% last year. So yes there are many not worth 1% of fees but some that are. So until I am not part of the 15,000 I’ll have to suck up the pride and accept being lumped in with the averages.
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BR: Thanks, I just confirmed this with MER
ML has a $5K breakeven on accounts?
This reminds me of the fees that big banks slapped on their custs and then often had to back away. The Big Banksters are desperate for more profits, they need to make up for all the defaulted mortgages that they keep as performing in their accounting records but the cash flow tells the truth.
ML will revisit this after they lose more good performing brokers and get sued, we’ve all seen this before.
PS The BAC overheads must be killing MLs profitability, hence step up from 100K to 250K. (And some moron has probably concluded the ML reps will be “incented” to upsell 100K accounts to 250K accounts, squeeze their existing client base harder
bostonfanny:
I just got off of the phone with MER, and the older accounts are grandfathered — It is on the new relationships where the fee gets crammed down from the broker to the house.
So my back of the envelope calculations are wrong — its only on the new accounts . . .
Yes, that is right. Add to it that the accounts are not typically fee based and its really an inconsequential event unless you are a small time advisor (or a newbie trying to grow).
Boy, some of your fans just jump right on your bashing bandwagon with some harsh words for the banks…DeDude, jlj, etc…
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