Merrill Continues to Innovate, But to What End?
“What kind of an idiot would give his clients checks?” a broker once asked me when we were discussing cash management accounts.
If you allow clients the convenience of taking money from their accounts, they will grab it, he said, and that’s not good for me. He wasn’t alone. No sane broker wants customers to pull money from their accounts.
Merrill Lynch, of course, thought otherwise, and in 1977 launched its CMA checking product to skepticism from rivals and, I’m sure, much pushback from the Thundering Herd.
The product, though, was a roaring success, and no firm today can do without a CMA-type clone. (Whether brokers should be credited for cash in clients’ money-market or bank sweep accounts is another matter.)
When I became a broker at Merrill in 1992, I was quickly introduced to another tool that was well ahead of its time. We were incentivized to create Financial Foundations, one of the first full-service financial plans for retail clients. We didn’t know what financial planning was, but the big bosses did. They saw the opportunities inherent in raising questions about insurance, retirement and inheritance taxes, even if the field was slow to catch on.
As these examples show, Merrill Lynch has long been a hothouse for innovation, laying the track that rivals and smaller regional firms with tighter budgets and less room for product error could ride.
The Merrill that I knew was a bellwether not only for product innovation but for training programs that have long larded the brokerage industry with innovative leaders. Many of my former colleagues, however, lament that the Merrill they knew has taken a new turn under its Bank of America parentage. As events of the past few weeks show, it continues to stand out from the competition, for better or worse.
I’m thinking of its bold, some would say reckless, stand in responding to the Department of Labor’s new fiduciary rule with a decision to walk away from commission-based retirement accounts. The litigation risk tied to the rule’s Best Interest Contract proved too daunting, and bank executives have the luxury of being able to offer a new robo-advisor, a conventional managed account program and pure discount brokerage as options to affected customers.
In a rare development, however, few rivals are following its lead. In fact, they are using the decision to differentiate themselves from Mother Merrill, setting off a marketing battle that pits Merrill’s professed dedication to fiduciary principle against what rivals are proclaiming as customer choice. The battle is for the hearts and minds of both clients and brokers.
“We’re committed to your best interest, Not the status quo,” Merrill boasts in expensive full-page ads splashed Thursday on the pages of The Wall Street Journal and The New York Times as well as in other papers and digital and social media outlets.
”The ad explains why the DoL Fiduciary Rule is a positive change for the industry, is great news for clients and underscores the firm’s position that retirement accounts are ‘essential to investor futures’ and deserve to be protected,” a Merrill official told us in a pitch to publicize the campaign.
The question in my mind is whether it positions Merrill as the courageous innovator that was its heritage or as a cowardly bull that will be badly stung by its first-mover position. Twenty years ago, its decision would have spawned a lemming response. Not so today.
“Morgan Stanley believes in preserving choice in how retirement accounts are managed,” scores of brokers at Merrill’s archrival have been tweeting in company-approved messages and since k-tcc broke stories on Merrill’s decisions to abandon commissions and mutual funds in retirement accounts.
Firms besides Morgan Stanley are sure to follow with public messages and through quieter inter-industry insinuations that the bullmaster is abandoning its herd of advisors. We are already seeing recruiters pitch the fiduciary glass-is-half-full argument at other firms to high-producing Merrill brokers.
It’s a compelling argument, though fiduciary rule challenges remain for all in determining how to price accounts, what fee or commission discounts to allow and how to memorialize the fact that every transaction and recommendation is being made in a customer’s best interest.
While I am disappointed in the unilateral and abrupt way that Merrill decided to cut commissions entirely, it could still prove to be the correct decision. We don’t know how the rule will play out, how broadly competitors will deploy the DOL rule’s Best Interest Contract Exemption or how quickly they will retrench at the first whiff of class-action lawsuits.
That being said, I can’t help but feel that Merrill is abandoning advisors. Call it sentimental nostalgia, but I would like to have seen Merrill brandish its horns and stick up for the advisor as the most critical part of the enterprise to ensure that clients’ best interests are served. I remember when we brokers were told, and believed, that the financial machine couldn’t work without us.
Regardless of the massive changes we are now experiencing, I would have loved to have seen Merrill continue to walk down paths that others fear to tread.
Tony Sirianni, CEO and publisher of k-tcc, was a broker, complex manager and executive director at Merrill, Legg Mason (Morgan Stanley and Smith Barney) and other firms for 20 years.