The Merrill Lynch Cramdown

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/