Exactly 30 years ago, Merrill Lynch launched the first CMA (Cash Management Account). The revolutionary new product combined an investment account, a transaction account (that pays interest on balances through automatic sweep), a debit card, and a credit line secured by the securities in the investment account.
It was a major success, and was soon copied by almost every securities firm. The CMA promise was one-stop shopping convenience for clients, enhanced broker productivity, enhanced broker and client loyalty to the firm, and enhanced cross-selling and share-of-wallet. But different firms developed different offerings, and different ways in which to compensate (or not) the brokers for the cash balances in the CMA accounts. As a result, the firms' success at transitioning their reps to these CMA-type accounts has varied significantly.
Today, even as firms continue to add innovations to their CMA accounts, the banking-brokerage-insurance convergence in the U.S. has yet to completely play out. But it will happen, and those firms that learn how to manage and use the CMA fully will win in the retail competition.
One of the strongest selling points on CMA accounts is FDIC deposit insurance. Customers are also attracted by the complete package of features that a brokerage/cash management account might offer, and are sensitive to the fees they have to pay. Firms allow brokers to waive fees to some extent in order to make the net interest margin on liabilities.
Most customers (who typically hold around 10 percent of their assets in cash) are not that sensitive to the interest rates on the cash portion of their portfolio. This allows securities firms to get away with paying very little for deposits. Securities firms earn spreads on deposits by offering depositors “tiered” interest rates, which step up as underlying assets under management increase. For small to average balances, the interest rates are minuscule, beefing up net interest margins.
The hurdle in the U.S. is that consumers are still partly under the influence of the Glass-Steagall Act, in the sense that they mentally separate banking from investments. They may bank online, but they still like the access to a brick-and-mortar branch.
Indeed, some of the most interesting illustrations of the power of the CMA concept (integrated account) can be found beyond the traditional U.S. securities industry. In Europe, Mediolanum, the leading Italian financial-advisor network, has recently been getting spectacular results with its “family banker” initiative.
Mediolanum has built a full-service advisor-led virtual bank, which integrates investments, insurance, retirement and banking/credit products. Mediolanum also provides customers with an “outsourced” branch network: Customers can use the branches of the Italian post office, and those of a major retail bank; Mediolanum pays for the service through a transaction fee.
Since 2005, Mediolanum expanded its sales force from around 5,000 advisors to around 7,000. Advisors have been re-branded and retooled as “family bankers,” and they are attracting new customers by offering an attractively designed and priced account, a CMA-like product.
The transaction account has proven to be essential in attracting customers, accounting for 80 percent of accounts opened in 2007 by new customers. Mediolanum has achieved outstanding cross-selling success with these customers: four to six times more assets, and three times more products sold to banking customers versus traditional customers (who only had an investment account).
Still, U.S. brokerages are making an effort to attract more customer assets into CMAs by packing a lot of innovative new features into the accounts. One approach, taken by firms such as Schwab, is to offer a simple banking account, separate from the traditional brokerage account. Merrill has taken a similar path with its “beyond banking” offering, with the distinction that the beyond banking account is not a true banking account, but a separate CMA account.
So far, only Smith Barney has gone the extra distance. As described by Mary Uslander, managing director for Banking Services, Smith Barney is offering its brokerage customers “integrated, but separate investment and banking accounts” through its affiliation with Citibank, on top of access to Citibank's entire network. Citibank customers can also access a dedicated Smith Barney representative inside the branch.
Other firms are offering a “turbo-charged” brokerage account. Some firms, such as Morgan Stanley, are trying to integrate all the best features of investment and banking accounts under one umbrella, attempting, in fact, to leapfrog Merrill Lynch. Peter Barsoom, head of Consumer Finance, describes Morgan Stanley's AAA account as part of the firm's strategy to go after day-to-day transactions. An elite customer will have many benefits, including unlimited free access to ATMs worldwide, obtaining the best existing rewards program with their debit card, and the ability to manage his or her whole financial life (investments, banking, loans, etc.) in one integrated statement.
THE KEY BENEFITS AND DRAWBACKS OF CMA:
CustomerRepBrokerage firmAdvantagesOne-stop shopping Integrated statementComprehensive view of customer assets “Opportunity for comprehensive financial planning and cross-selling” Enhanced asset-gathering, Productivity for repEnhanced customer loyalty Enhanced rep loyalty Increased share of wallet via cross-selling Banking and lending services Reduced customer credit riskDrawbacksMore difficult to switch firmsMore difficult to take clients when switching firms
BRIEF HISTORY OF THE CMA: MERRILL LED THE
Flashback to the late 1970s: Inflation was unprecedented — the Consumer Price Index reached 13 percent in 1979. Interest rates were climbing, and were to peak with the prime rate over 21 percent in 1980 when then-Federal Reserve Chairman Paul Volcker attacked inflation through a shock treatment of very high real interest rates.
Under Glass-Steagall at that time, the banking industry and the investment industry were quite distinct. Retail investors kept their deposits at the bank, often in low interest savings accounts, and their securities with their broker. When they bought stocks they had five days to pay, usually by check. Brokerages enjoyed lucrative “free balances,” the inevitable float.
The big development of the mid-1970s had been the spectacular growth of money- market funds, which paid market rates for balances. Large amounts of money left banks to go to money-market funds. Brokers were worried about losing their “free balances.”
Merrill's CMA was initially motivated by mostly “defensive” reasons:
Preventing “asset drain” to money market funds.
Reducing customer credit risk through ready access to the customer's investable cash, rather than needing transfers from customer's bank account.
Tying the client to the firm (transaction accounts tend to be “sticky”), and making it harder for defecting brokers to take accounts with them.
Merrill made it easy for brokers to offer the CMA without the fear of increasing their administrative duties by setting up a separate service team. And 10 years later, in 1987, Merrill started requiring its reps to open all new brokerage accounts as CMAs. As a result, over two-thirds of Merrill's retail accounts are now CMAs.
Merrill has also been successful at making the CMA quite profitable by earning a substantial spread-net interest margin on the cash balances. In 2000, the sweep feature of the CMA switched from money-market funds (MMF) to FDIC-insured money-market deposit accounts (MMDA). The reasons for that switch were:
FDIC insurance provided a strong marketing argument; in particular it helped Merrill defend from the competition of electronic discount brokers.
The MMDA would be much more profitable (150 or even 200bp margin for MMDA vs. 35bp for MMF). In fact, CMA profits reached at least $1.5 billion pre-tax.
Building up the deposit side of the balance sheet of the Merrill Lynch banks would allow Merrill to compete better with different products (lending, in particular).