I was asked to write an opinion piece for today’s Financial Advisor IQ (A Financial Times Service) on whether or not a spin-off of Merrill Lynch from Bank of America would be a good thing or not. Here it is:
Despite the bureaucratization of the legacy Merrill Lynch culture, the wirehouse is still better off in Bank of America’s hands, as any spin-off would put it structurally on much weaker footing, says wealth-management consultant Andy Klausner.
Last Friday, General Electric showed how easy it is to break up a big business, as the firm sold off parts of GE Capital to help lose its title as a systemically important financial institution.
Bank of America shareholder Bartlett Naylor wants the bank to shed that distinction too, by divesting business units including Merrill Lynch.
But although the SEC has rejected Bank of America’s request to ignore Naylor’s recommendation, don’t count on another breakup, either there or at other banks with sizable wealth shops.
To start off, management will oppose the move. Executives will argue that the bank-and-brokerage combination diversifies revenue streams and that cross-selling has helped their wealth-management clients.
And if management opposes these spin-offs, only a few things could eventually force the banks’ hands: increased regulation or legislation — both of which seem unlikely with both chambers of Congress under Republican control — or mass advisor defections that would severely impair profitability. While this second idea is intriguing, it too seems highly unlikely.
So let’s focus on the advisors. We have all heard complaints from legacy Merrill Lynch FAs that the firm’s culture has changed since the merger and that they are under pressure to sell bank products. And frankly, they are probably right. But it’s important to remember that advisors are free agents. They can move to another firm anytime.
While some advisors have left, most have not. And the firm is recruiting new, larger producers at a steady clip, despite increased competition from alternative channels. In addition, like many of the large wirehouses, Merrill has shown steady overall financial improvement. And some of Merrill’s products, like its fee-based programs, continue to lead the industry in innovation.
Also, let’s not forget that Bank of America did save Merrill from probable bankruptcy. Many of these same legacy advisors were pretty happy back at the beginning of the financial crisis. Then, the bank helped reassure nervous clients and protect the reputation of the Merrill brand.
It’s human nature to complain about your boss and your company. But for those who are really unhappy or feel their businesses are threatened, the option to leave is always there. The fact that many Merrill advisors have stayed is a telling story in and of itself.
Wealth unit spin-offs could have negative side effects. Clients who like the security of having a large, stable parent in the background might get nervous and move their assets. They could become fearful that another crisis would bring the smaller, potentially less financially stable firm down.
And change is always difficult. There would be systems conversions, changes in the way accounts are handled and changes in personnel policies. The advisors who have stayed despite their misgivings would have to begin explaining such changes to clients. If they really thought about it, they might not be so vocal. Ultimately, shareholders, advisors and clients alike should be careful what they wish for.
