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Success will depend on how closely BoA/Merrill Lynch can tie the new online brokerage to its full-service offering
June 21, 2010 — 6:19 AM UTC by Brooke Southall
Brooke’s Note: I’ve heard the same comment about wirehouses from several sources ranging from heads of asset custodians to research analysts: “They’re not stupid.” The backhanded compliment comes as a follow-on to my question: Will wirehouses stop or slow the steady erosion of advisors and assets that they’re experiencing right now? The answer combines memories of painful experience when these competitors flexed their marketing muscle to great effect and the dumbfounding knowledge that wirehouses have hardly made a competitively threatening move in years. So now Bank of America is at least making a move. Will it be effective? Maybe. They’re not stupid.
In a move that may eventually give BofA another way to feed clients to its highly profitable wirehouse, the bank launched – or relaunched – an online brokerage business under Merrill Lynch’s name today.
Merrill Edge, which officially goes live today (see screenshots below), is actually just Bank of America’s online broker being given a more Merrill-y name, analysts say. Merrill Lynch formerly rolled out MLDirect.com, but it’s not clear whether it will continue as a separate entity.
A BoA executive told Bloomberg in an interview that the move is intended to allow the wirehouse to better compete with Schwab, Fidelity and other established online brokers. Analysts are skeptical about Merrill’s ability to do so: the likes of Schwab and Fidelity are well-established in a market in which few customers switch.
But Merrill’s expanding presence in the online market may be less about winning in that market – and more about feeding customers to wirehouse advisors through cross-channel collaboration, say analysts.
“We do not view Bank of America/Merrill Lynch’s new online brokerage product, Merrill Edge, as a serious competitor near to medium-term to Schwab and TD Ameritrade,” wrote Celeste Mellet-Brown, a senior research analyst for Morgan Stanley, on Friday. Her comments are fairly typical of the ones made by analysts.
“Bank of America and Wells Fargo/Wachovia have had online brokerage products for some time and they haven’t impacted TD Ameritrade and Schwab’s ability to grow assets – clients choose to use one product over another and don’t easily switch.”
Matt Snowling, an analyst with FBR Capital Markets in Arlington, Va., wrote on Friday that Bank of America “will need to invest hundreds of millions in technology, customer support, and branding to truly compete for new customer assets.”
Yet, Adam Honoré, a senior analyst at Aite Group of Boston, believes that Merrill Lynch may have made a shrewder move than many people realize. Honoré is author of the report: “The direct business ambush: advisors not seeing the threat.” (For more information about that report, read: Online brokers may be a bigger threat to financial advisors than they realize)
“I think this [move] is going to be effective but one of the challenges they’re going to have to face is how to tie this [online broker] into the [full-service] advisory firm,” he says. “Otherwise it’s just another online brokerage site and there’s lots of really good online brokerage sites out there. The reason you’d want Merrill Lynch is that you’d want access to their advisors and to their training.”
Broker hand-off plan
Such access could take the form of a team of advisors who handle inquiries “up to some form of a hand-off plan” where customers being handled by call centers could get referred to a full-service broker as their assets grow and their needs for advice become more sophisticated, Honoré says.
In this “hand-off” endeavor, Merrill Lynch could have – in one respect – an edge over Fidelity, TD and Schwab, which have been successfully handing off billion of dollars of assets from their branches to RIAs for several years, according to the Aite analyst.
“Schwab has to hand off [the client] to a third party; Merrill Lynch gets to keep it” which is a big advantage,” he says.
But a spokesman for Schwab adds that his company in fact offers broader referral options.
“We 'hand-off’ formerly self-directed clients who decide they want help or even money management not just to Schwab Advisor Network, but to internal capabilities as well — including to Schwab Private Client and a managed accounts program,” he says. “The beauty of our model is that there is a range of solutions available, giving clients the option to get a best-fit for their need.”
There are two other ways that Merrill Lynch can make hay out of its new online brokerage unit, Mellet-Brown says in the notes to clients.
“Merrill Edge will focus on: 1.) Offering its existing advisory clients an online trading tool for “play money” – and incentivizing advisors to push the product on their clients for referral fees, though channel conflicts need to be addressed, and 2) Offering mass affluent clients who aren’t currently profitable advisory relationships [for full-service brokers] a brokerage service associated with the Merrill Lynch brand early in their investing lives. While logical in theory, we believe it will take time to build.”
Tough bananas on channel conflict
Raymond James Financial Inc.’s analyst Patrick O’Shaughnessy, also wrote in a research note that Merrill Lynch could pay a price because of the channel conflict it causes. Financial advisers could jump ship because they fear Merrill Edge could cannibalize their clients.
Indeed, many Merrill brokers have feared that BoA would make changes that didn’t respect their position at the firm. See: Merrill Lynch team leader broke away for fear of what might happen under Bank of America
But competition with Schwab and Fidelity is now so fierce for Merrill Lynch, that channel conficts no longer are of the same paramount concern as yesteryear, Honoré says.
“At this point, [executives of Merrill Lynch] have to say [to brokers]: that’s tough,” he says.
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