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Report: Merrill Edge Threatens Online and Regional Brokers, Not Its Own FAs

Merrill Edge is a serious challenge to the online brokerage powerhouses such as Charles Schwab and Fidelity Investments, as well as to independent and regional broker dealers, according to a new report from Aite Group. The report also suggests that online do-it-yourself offerings can help a retail financial advisor, rather than hinder him.

A new report, slated for publication by research firm Aite Group this week, sees Bank of America Merrill Lynch’s recently expanded online brokerage business—its much publicized Merrill Edge platform—as a serious challenge to the online business of powerhouses such as Charles Schwab and Fidelity Investments, as well as to independent and regional broker dealers. The report also suggests something that may surprise some financial advisors: online do-it-yourself offerings like Merrill Edge can enhance a retail financial advisor’s offering, rather than compete with it.

The Boston-based independent financial services research firm says in its report that the June launch of Merrill Edge, Bank of America’s platform for mass affluent investors with less than $250,000 in investable assets, has the potential to shake up a widely-held view among wealth management execs: That the self-directed channel is not “critical” to the success of their mass affluent programs.

The conventional wisdom is dead, Aite says. Investing habits have dramatically changed in the wake of the financial crisis of 2008 as technological changes, including social media, and innovations, such as the iPad and iPhone, have combined with a new desire among investors to take more control.

The message is not lost on those financial advisors who are paying attention, according to the Aite report, titled “Merrill Edge: Online Broker or Innovative Business Model for the Mass Affluent,” (an advanced copy of which was made available to Registered Rep.). “Many financial advisors realize that keeping online trading away from their clients will only drive the business of certain clients towards competing online platforms, which will move their assets away from them even further,” Aite added. “Advisors who realize that their main added value is not trade execution but delivering professional advice do not have an issue with providing online trading to their clients.”

Merrill Edge, which today has some 1.4 million customer accounts, according to Aite Group— representing client assets that hover around $50 billion, a mere fraction of Bank of America’s $1.45 trillion in client assets—should create a huge crossover opportunity, Aite analysts write. The platform offers investors two ways to invest—through an advisory relationship or through self-directed tools—across three different channels: online, phone and branch.

Aite sees great potential opportunities for Merrill Edge to tap a portion of the 13 million emerging and mass affluent clients of the Charlotte-based Bank of America bank giant that don’t currently have an investment account at Merrill Edge. Merrill is pretty optimstic about this potential as well, and projects 20 percent growth for Merrill Edge over the next several years, notes Aite. As of the third quarter, 271,498 Bank of America clients had been reportedly referred to Merrill Edge.

“The Bank and Brokerage-supported Merrill Edge also allows BofAML [Bank of America Merrill Edge] to compete more effectively against online brokerage power houses like Charles Schwab or Fidelity Investments. The latter firms have started many years ago to offer banking products to its brokerage clients, and with that taking deposits and card business away from traditional banks like Bank of America.” Merrill is also a threat to independent and regional broker dealers. FAs at these firms tend to work with more clients in the lower tier mass affluent segment targeted by Merrill Edge, Aite explains.

The report, authored by Alois Pirker and Sophie Schmitt,added: “Merrill Edge will allow Bank of America to fight back by cross selling Merrill Lynch-branded investment products to its banking clients. Compared to the online brokerage players, Merrill Edge is bringing the combined banking and brokerage business model to the next level, as the banking side is backed by the infrastructure of one of the nation’s largest banks, including an extensive network of branches and ATMs.”

Aite says financial advisors at Merrill should “feel good” touting Merrill Edge to those accounts with less than $250,000 in assets. After all, they get a small incentive in the form of a nominal payout on clients that move to the platform. The arrangement permits advisors to work again with these same clients, once their balances tip the minimum threshold.

“Another benefit of the self-directed offer for advisors is their ability to use this platform to attract or retain their clients’ self-directed dollars,” said Aite. “Merrill Lynch clients who are currently trading at a competitor for $8 to $10 a trade may be more inclined to transfer their self-directed asset to Merrill Edge where they can obtain $0 [free] trades and receive the benefit of consolidating [account] information with their full-service account information.”

Verdict Still Out

Of course, Aite says there are some potential roadblocks. Other large retail banks have tried and failed to build direct platforms for clients, says the report. That includes, Citigroup, which launched MyFi in the summer of 2008 and closed it in late 2009, after it spun off its Smith Barney brokerage operation. (Citi ended that program primarily because it would no longer get referrals from the now spun-off brokerage arm, say some.) These other projects failed for a number of reasons, including a lack of partnership with and referrals from the consumer bank. Compensation, compliance and cultural issues could cause the same problem at Merrill, says Aite. Due to regulations, incentives for bankers to refer to a broker/dealer program can’t exceed $25, and this may not be large enough to motivate bankers.

There could also be some resistance in the other direction: Merrill’s so-called thundering herd of financial advisors may not want to refer clients to Merrill edge for fear of losing assets. That fear of so-called “cannibalization” has been brought up before, including in a recent Cover Story in Registered Rep. magazine. (See, Registered Rep., August 1, Don’t Talk to Chuck, and this blog post, by Registered Rep. Editor-in-Chief David A. Geracioti.) “The firm’s concern about the cost of servicing clients is not shared by financial advisors,” Aite writes. “Many financial advisors would likely prefer to retain these emerging affluent clients in the hopes that they would grow their assets.”

Nonetheless, one FA at Merrill Lynch is not worried. He told Registered Rep. this week that if Merrill Edge lives up to the hype, it will become a “kind of incubator for profitable clients down the road that want a relationship with an advisor once the assets in the clients’ accounts are large enough.”

“Most of the advisors at Merrill don’t view Merrill Edge as a cannibalization issue,” this advisor added. “I don’t see it as a competitive disadvantage, as something that is competing against me.”

Another potential problem is that clients may not actually care all that much about consolidating their assets with one firm, says Aite. “Many clients may prefer to hold their assets across several financial institutions for risk management reasons. This is likely to be especially true today following the collapse and near-collapse of several large financial institutions.”

Aite says the “verdict” on Merrill Edge is “still out.” It describes the architecture as excellent but notes that the cooperation of bankers and financial advisors will weigh heavily on the program’s success.

Selena Morris, a spokesperson for Bank of America Merrill Lynch said the company is pleased with the “progress” of Merrill Edge, which it views as a unique offering in the wealth management space today.

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