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Due Diligence
Merrill Edge on Hiring Binge, Gets One-Third of Clients From FA Referrals

Merrill Edge on Hiring Binge, Gets One-Third of Clients From FA Referrals

merrill-lynch-bullDoes Merrill Edge, Merrill Lynch’s brokerage, banking and financial advice platform for the mass affluent (those with $100,000 to $250,000 to invest), compete with Merrill Lynch financial advisors? In an interview with the head of Merrill Edge, Alok Prasad, we couldn’t get a straight yes or no. That’s because the answer is probably, sure, just a little bit. But Merrill Edge also can serve as a source of new business for Merrill FAs, through referrals, and those are beginning to grow, said Prasad.

Merrill FAs get incentives (30 to 120 basis points on assets) to refer their mass affluent clients to Merrill Edge, and these now make up around a third of referrals to the program, Prasad notes in the interview. Approximately another third comes from Bank of America’s consumer banking division, and the rest from 401(k) rollovers. But referrals have started going the other way as well.

Merrill has made it financially untenable for most FAs to take on new clients with fewer than $250,000 in assets, the target client for Merrill Edge. Under its 2012 compensation plan, Merrill will apply a 20 percent payout to all new client accounts with fewer than $250,000 in assets. And if more than 20 percent of an FA’s clients are this size, Merrill won’t pay at all for the new mass affluent clients. Some advisors were unhappy with the new minimum, as they said these smaller clients often grow into bigger clients and can be good sources of referrals. And in tough markets, some of them are willing to take whatever they can get.

Ultimately, Merrill Edge is a much lower-cost way for Bank of America to provide financial advice and to promote cross-selling with clients who don’t provide much profit. After all, the financial solutions advisors (FSAs) who work with clients on the Merrill Edge platform are likely quite a bit more loyal, less independent, and less expensive than your average financial advisor. Whereas FSAs are employees who earn a salary and incentives, financial advisors have to go out and drum up business themselves and live by their wits. Merrill Edge is also well-timed to head off competition to the full-service financial advisor model from other low-cost direct platforms. That competition is growing, says a Cerulli report out this week.

Merrill is throwing its weight behind the relatively new platform, with plans to nearly double its FSA force to 2,000 by the end of 2012. Today, Merrill Edge has 500 FSAs in branches and 700 in call centers and it wants to have 1,000 in each, said Prasad. We spoke about the platform’s growth, whether it competes with Merrill advisors, as some of them have grumbled, whether it courts high-net-worth individuals, and where Merrill Edge fits in the firm’s rookie training program.

Registered Rep.: Does Merrill Edge compete with Merrill financial advisors? Alok Prasad: Since the launch of Merrill Edge in the summer of 2010, we have had pretty good success. The growth has been pretty strong both in terms of accounts, assets as well as revenues. We’re getting 20 percent account growth, 20 percent asset growth, etcetera. And so our approach, and when we launched Merrill Edge, was to step back and take a look at what are the needs of mass affluent clients, those with $250,000 or less. So far it has proven to be very successful. The client feedback has been phenomenal.

RR: Does Merrill Edge also have HNW clients who do their own self-directed investing on this platform?

AP: We do have some of them. Those are clients who are picking us for some of the tools and trading capabilities that we provide. Don’t know the exact number but I would definitely classify them as the minority. The bulk of our clients have under $250,000 in assets. If someone has more complex needs they go to our FAs. There are also clients who are advice clients who choose to do a portion of their investments on Merrill Edge, who enjoy their own financial analysis, who enjoy some of their own trading, but like their long-term assets to be managed by an FA.

RR: To what extent do new assets on the Merrill Edge platform come from Merrill FAs versus from outside Merrill Lynch?

AP: If you look at our year-over-year growth, the biggest growth is coming from our consumer channels. Our consumer referrals are up over 260 percent. It’s a strong pipeline of customers who are doing banking business. As a consequence of that, what we have done is put our Merrill Edge financial solutions advisors in those banking centers. So, we now have over 500 FSAs in select banking centers across the country and we plan to grow that to 1,000 by year-end. And that is in response to the strong demand we’ve seen.

RR: What percent of new clients come from FAs, or 401k accounts?

AP: In terms of the volume of accounts we are getting, it’s getting evenly distributed now between consumer, FA and retirement accounts. The clients who are coming from FAs are the ones FAs are referring them to us. Then we have our retirement platform, clients who are rolling over their 401ks. As you look at our experience now they are very well balanced out in terms of the flow of clients from each of those channels—not exactly one-third, but they are pretty comparable with each other.

RR: Have you already begun referring Merrill Edge clients to FAs?

AP: Oh, absolutely. In terms of the growth, again this is something we’ve been doing for the last year or so, since the launch, and the volume has been consistently increasing on both sides. As advisors are becoming more comfortable with the platform and the value proposition, and seeing that this is the right place for many of their clients, they’re sending them over. And as we are adding resources in the banking centers and surfacing more clients who fit the profile and the right service model for them as FAs, we are referring them to advisor. We have seen pretty strong growth in our referral volume. We have seen a 15 percent increase since the launch in terms of referrals, on both sides.

RR: Are there incentives for FAs to send clients to Merrill Edge?

AP: Yes. Depending on whether the client is looking for self-directed brokerage or advice, it’s based on assets that the client brings in, and it’s a one-time payout. There’s a framework there, that ranges anywhere from 30 basis points to 120 basis points. It’s a framework that we use to make sure we compensate our FAs appropriately.

RR: The FSAs, are they providing advice at all, or are they just trying to figure out where these clients might fit?

AP: I would classify it as both. When they are in the center talking with the client, they would try to understand what are their needs and what is the client looking for. If the client says hey, I’m pretty comfortable making my own decisions, I’m not looking for help, what can you do for me, they’ll point them to our online center. But if they are looking for advice and if their needs are more complex, or the asset level is much higher, our FSAs will refer them to a Merrill FA. Let’s say they have $100,000 to invest, then the FSA would sit down with them and talk about their planning needs for retirement, their kids’ education, they would work with them to create a plan and a recommendation as appropriate.

RR: How are they paid?

AP: The FSAs are not commission-based. They are salary and incentive-based.

RR: Are you training these FSAs or are they already experienced in the industry?

AP: The majority of them are already experienced in the industry but we do provide our own training. They’re are all licensed associates.

RR: Is there a potential job path for the FSAs to move into an FA role?

AP: Absolutely, that is part of the strategy. To give them the experience and know-how to work with clients and over time if the FSA wants to be an FA, absolutely, there’s a career path there. It’s not yet a big part of the training program but it’s an opportunity we want to lever. We’re going beyond it being incidental, but again it’s relatively small.

RR: Are the FSAs are acting as fiduciaries?

AP: They are series 7 licensed advisors, and they create and implement the plan so they don’t do discretionary management or anything like that.

RR: If the Department of Labor proposal goes through, all IRA accounts will be subject to the fiduciary standard.

AP: Yes, we will follow the same norms.

RR: What’s the average age of clients you’re serving on this platform?

AP: They’re younger. Half of our new clients coming in are under 40 years of age.

RR: So this is partly a play for younger generation of clients—Gen X and Gen Y clients?

AP: Absolutely. In the continuum of their needs, the age and assets have a correlation. As people age, they become wealthier. So we do serve younger clients, clients who are single, married with kids, pre-retirees, retirees as well, but there is a strong interest from clients who are younger.

RR: How does the kind of advice offered in the field versus offered in the call centers differ?

Anne Pace (media relations): It’s exactly the same. Because it’s up to client how they want to access the service. So if they want to work with someone face to face, they can do that with the FSA in the banking center. If they want to use the phone, they can do that as well. We’re also testing new technologies for video conferencing, desktop video, Skype. We’re testing all different types of channels so that we’re there to serve the customers however they want to do it.

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