Unlocking Real Value Blog

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.

I was asked to comment in an article in today’s Ignites (A Financial Times Service) on the hiring of sales professionals. A recent Cerulli report found that 41% of fund shops expect to add to their distribution sales forces this year. The question is, are these hires simply a reaction to the continuation of the bull market or are they more strategic in nature?

I take the view that they are more strategic, and a response to the expansion of the independent and quasi-indepenent advisor networks. There are more advisors out there working for varied types of sponsor firms. You need to be able to provide support to each of them.

To quote from the article: “RIAs’ and quasi-independent advisors’ growth has driven fund firms’ enhanced sales efforts in those channels, says Andy Klausner, founder and principal of AK Advisory Partners, in an e-mail response to questions. This has led to strategic distribution build-outs rather than full-scale expansions, he says.

“I think a lot of firms learned from the 2008 crisis and have been a lot more prudent in their hiring decisions; the old ways, of always hiring too many people during good times, has changed,” Klausner says.

Fund companies should create three- to five-year strategic plans when expanding their intermediary distribution teams, and adjust those according to firmwide assets, profitability and the effect of market fluctuations, Klausner says. Such planning helps protect against “knee-jerk” staffing cuts, too.

“Distribution is still needed during lean years — to train advisors, meet new advisors, hold hands, etc.,” Klausner says.”

Do you agree, or do you think fund companies are over-hiring?

I was asked to comment on Stifel Financial’s announced  acquisition of Sterne Agee, particularly on the effect that it will have on asset management firms that work with the two firms. The article appeared in today’s Fundfire (A Financial Times Service).

In general, this seems like a good move for Stifel, as it allows it to pick-up a high quality firm and add a reasonable number of advisors. I say reasonable because it is not the number of advisors that you have that matters – biggest is not best – but the quality. This allows the firm to widen its footprint and solidify its market position.

As with all mergers, the proof will be in how the integration goes – if the firm retains top producers, if they become more efficient and reduce overhead, if costs are contained, etc. Stifel also now is able to enter the independent channel without having to develop their own from scratch. In some cases, buying it is better than building it.

How will the merger affect asset managers that work with the two firms? That is hard to say for sure right now. To quote from the article: “The impact on asset managers distributing through the firm will depend on how integration eventually shakes out, says Andy Klausner, a strategic consultant with AK Advisory Partners. “From the asset manager’s point of view if they can get to more advisors through fewer gatekeepers, that’s always a positive,” Klausner says.

Mergers can provide opportunities for some managers already working with the firms to gain wider distribution with a new group of advisors. But it can also result in some managers losing shelf space.

“This would be an opportunity to look at the product sets of both firms and condense them,” Klausner says. “Let the best platforms survive.”

For managers doing business with the firm, the best approach is likely to wait and see how the integration plays out, he says.”

Any thoughts?