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 . . .


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.


Merrill’s 2012 Pay To Drive Advisers To Richer Clients
Jennifer Cummings
WSJ, December 23, 2011

Category: Bailouts, Corporate Management, Investing, Wages & Income

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

34 Responses to “The Merrill Lynch Cramdown”

  1. Sechel says:

    Have financial advisors made the vast majority of their clients rich, or just themselves and their firms?

  2. BennyProfane says:

    2%?? So…….what kind of returns were these geniuses getting their “clients” for 2%? A “billion dollar theft”, indeed.

  3. [...] Barry on the Merrill Lynch cramdown.  (TBP) [...]

  4. chris whalen says:

    Ditto on FAs going away from big firms, but not to Wells, MS and UBS. Those happy hunting grounds are doing the same thing as Merrill to FAs.

  5. GeorgeBurnsWasRight says:

    There’s another explanation for the change other than BAC’s finances being in danger. Top management may have decided to pay their employees less so they could pay themselves more.

    A friend at one of the larger corporations was given the job of laying off enough employees to save $1 million. He was told that the reason for doing this was that the CEO had demanded a extra million dollars for his bonus that year.

  6. Sechel says:

    Those small accounts can sometimes cost more than they bring in.


    BR: Yes, it varies.

    It depends upon the rest of the relationship with other families, the persons growth potential, etc.

  7. SteveC says:

    So, they are cutting expenses and asking employees (contractors) to do more with less? This has been happening everywhere else in our economy for quite some time. Why the outrage when it happens in the financial sector?

  8. jlj says:

    BAC thinks their adding 2 billion to ML’s bottom line. Add to that the 1-3 trillion? in derivative debt/losses they were able to get off of ML’s book and on to the bank’s books and it looks like BAC is prepping ML for a spinoff?

  9. mathman says:

    off-topic, but an interesting take on the Greece problem:

    What was done to Burmingham Alabama (and their water system) was done to Greece (and Italy) via the same big bank interest rate swaps and then betting against them.

  10. Moe says:

    I feel for those advisors who have served their clients for years and have long-standing relationships with them – the big banks have trashed most of those relationships – they don’t want the advisors “owning” those relationships.

  11. bocon007 says:

    Well, many of these same disgruntled Merrill Lynch employees had a chance to support a movement whose clear intention was to limit abusive behavior on the part of Wall Street investment firms and to re-think the warped bonus structure of financial industry executives. The movement’s home base was no less a few blocks from Wall Street. The movement even inspired satellite protests all across the country, so even a Merrill Lynch employee located in San Diego, Denver, and Atlanta could play a part.

    You can’t make it more convenient that that. I want to feel for these Merrill Lynch representatives. I really do. But I wonder how many of them were decrying the hippie, unwashed masses in Liberty Park when they had a chance to make a difference.

  12. bostonfanny says:

    Barry – I’m a big fan but you’ve got your math all wrong. This is not a billion dollar change for the bank…it may be a $50 million change if they are lucky. Most clients who have less than $250k do not have a fee-based relationship with their advisor and therefore are not generating 2% or anything close. They are likely small stock and bond accounts that generated commissions at some point but are not longer doing so. The bulge bracket firms are not making money on these accounts and they are a drain on the advisors time and resources, which is why they are making this change.

    The only advisors who should be upset about these changes are those who don’t know how to grow their own businesses. The writing has been on the wall about small accounts for a decade at all of the big firms.

    But to suggest that the banks are going to make billions, let alone hundreds of millions, is absurd

  13. DeDude says:

    “A stupid idea this short term and self-destructive can only mean their financial position is even more precarious than I previously believed”

    Exactly. BAC has made some amazingly stupid moves lately to try increasing their revenues. I would not be surprised if they go down before the election. Obama needs to take down at least one of the TBTF institutions before the election so he can show that the financial reforms are working and that he is not just a servant for the TBTF.

  14. Jverse says:

    Big fan here as well, and one that (fortunately or not) still has his bull riding boots on. This is a shisty move but doesn’t affect my current relationships. Any and ALL that I have under 250k my team will continue to be paid 100% on the fees that are generated. The new 250k rule only pertains to new relationships. And to set the record straight our average fee per account is closer 1% not 2%. As for returns there are several of us who are tactically minded who seek most of their research and strategies externally that have Global Macro portfolios that were up 6% last year. So yes there are many not worth 1% of fees but some that are. So until I am not part of the 15,000 I’ll have to suck up the pride and accept being lumped in with the averages.


    BR: Thanks, I just confirmed this with MER

  15. rktbrkr says:

    ML has a $5K breakeven on accounts?

    This reminds me of the fees that big banks slapped on their custs and then often had to back away. The Big Banksters are desperate for more profits, they need to make up for all the defaulted mortgages that they keep as performing in their accounting records but the cash flow tells the truth.

    ML will revisit this after they lose more good performing brokers and get sued, we’ve all seen this before.

    PS The BAC overheads must be killing MLs profitability, hence step up from 100K to 250K. (And some moron has probably concluded the ML reps will be “incented” to upsell 100K accounts to 250K accounts, squeeze their existing client base harder

  16. bostonfanny:

    I just got off of the phone with MER, and the older accounts are grandfathered — It is on the new relationships where the fee gets crammed down from the broker to the house.

    So my back of the envelope calculations are wrong — its only on the new accounts . . .

  17. bostonfanny says:

    Yes, that is right. Add to it that the accounts are not typically fee based and its really an inconsequential event unless you are a small time advisor (or a newbie trying to grow).

    Boy, some of your fans just jump right on your bashing bandwagon with some harsh words for the banks…DeDude, jlj, etc…

  18. ToNYC says:

    Grandfathered fees or not; that growth is retarded. As more usual, all the sub-getting paid groups get the next call. That’s what you get these days and less when you don’t think for yourself and let the fox and the wolf help you decide.

  19. [...] Banks are looking for revenue wherever they can find it:  financial adviser edition.  (Big Picture) [...]

  20. DeDude says:


    Well with the current accounting “mark-to-fantasy” rules, you have no access to the real numbers – and just have to assume the worst whenever a bank do something stupid to increase short term profits. If we had honest accounting nobody had to act on rumors. If the banksters were smart they would demand honest accounting rules – unless they actually are under water. Hmmm – how come they have not demanded, or delivered, honest accounting….

  21. lalaland says:

    Well, then, either all that ‘talent’ will flood the market and make itself cheaper, or all that ‘talent’ is a misnomer; there are a few people who are exceptional and a lot of overpaid mediocrity. If this is a real market too many bankers chasing too few substantially rich people would either lower costs or improve performance as the 2nd and 3rd rate FA lose their clients/jobs, right?

  22. htouryalai says:

    My question is why is anyone with $250k in assets working with a Merrill Lynch advisor? How much time and attention are you really getting from a Mer broker at that level?

    Youre better off working with a fiduciary investment advisor at that point. And if youre hooked on the “brand” then there’s always Merrill Edge…but then again, why be sent to a call center?

  23. PWMAdvisor says:

    From what I’ve read with what’s going on with BAC and ML is that BAC has established an additional financial advisor role that sits within the BAC retail branches. They are to handle accounts/relationships that are less than $250k. Read into that however you want but I find this very interesting. These new advisors are to refer larger opportunities to ML advisors and I would imagine this new rule is to reciprocate back to the new BAC advisors. ML advisors probably get some sort of reward for the number of referrals, etc. and vice versa. It’s the typical top down BS that these big banks do all the time where you have an idiot at the top making unrealistic decisions. This type of nonsense obviously creates fighting between the two lines of business. Then there’s US Trust. I’m surprised they still exist. Talk about a complete flop.

  24. newest1 says:

    Add to this the cross-selling of Bank products that is “highly encouraged”. (i don’t work there, but for another company with similar situation)

  25. [...] Barry Ritholtz highlights a disturbing trend amongst the large wirehouse firms today on his blog: [...]

  26. rd says:

    The new clients will be better off going with less expensive shops like Vanguard, T. Rowe Price, and Schwab anyway.

  27. robert d says:

    Yep. The last time you beat up Bank Of America twice in one day on TV shows, Barry, the stock was $5.12. Today, a month later, it is $6.27 I believe. What percentage is that in a month? Oh, about plus 22% plus or minus. We new BAC stockholders beg, yes implore, you to continue. We are not saying that this is a great company, but one must admit that it has been a terrific short term investment.


    BR: I am certain the low price for the decade was your very first buy in it, and you have not been averaging down since $47

    Sold to you.

  28. ToNYC says:

    Go to the mattresses with cash and grow with your beliefs, targeted purchases (tools best and equity in what you use and watch or sweat-equity start-ups) and relationships beyond cash appreciation.
    Marc Cuban talks about the transactional value of cash. Are you using yours today for what won’t be there tomorrow?

  29. FormerML says:

    So, let’s take a Merrill look back a few years, shall we? Back about 2006, ML decided to no longer pay FAs for “new accounts below $100K”, however existing accounts would be “grandfathered”. The next year, ALL accounts (existing or new) were encouraged to be moved to the call center in New Jersey, so the firm gave a one-time enhanced payout for all accounts that FAs sent away. The next year, FAs were told they would have to justify all accounts still around that were under the $100K “Call Center Limit”. Locally in So Cal, if you could show that you were getting at least a 2% fee– or higher– from these small accounts, you could keep them.

    What happened next? ML got rid of “small, non-ML-type” clients by sending them to a call center (After all, an account that small doesn’t “DESERVE” to be with ML, said local management). ML encouraged some FAs to make the move and leave in order to consolidate big left-behind clients with FAs into ever growing books that produced the highest revenue. ML cut costs, increased revenue per FA and sent the little guy to Jersey, where service was sparse.

    Anyone want to guess what the next the years hold for sub-$250K accounts at ML now? Or should we go ahead and move to sub-$500K accounts?

    Yeah, all firms want to increase revenue. However not ALL wirehouses try to increase revenue by torching smaller clients at the same time they step on the back of their employees to line their own pockets. But that’s the MERRILL way.

  30. Merrill Man says:

    robert d

    You respond to a critique about management behavior by using a short term pop in a stock to undermine the argument, as if this was about a trading idea. Please point us to where you were pounding the table to buy BAC at $5.12 — better yet show us your P&L for the past 10 years.

    You are a classic stock internet troll — don’t you need to hurry back to the Yahoo Message boards ?

  31. Merrill Lynch raises the bar for its brokers

    Advisers in the bottom quintile of production and those working to build their books — often by taking on smaller accounts they expect to grow in the future — are the most likely to be hit hard by this year’s adjustments.

    “It’s not going to affect my paycheck, but we’ve got a lot of trainees here and this is going to be tough on them,” said one long-time Merrill adviser.

    Trainees aren’t the only ones that could get pinched by the changes to the payout grid. Advisers in smaller markets with fewer affluent clients to pursue could also see their compensation take a hit.

    “If you’re an adviser in Tuscaloosa [Ala.] or Little Rock [Ark.], there are a lot less affluent clients to pursue,” said recruiter Mindy Diamond. “To hold advisers in small markets to the same compensation model doesn’t seem fair.”

  32. [...] Lynch tries to save money by changing the rules with its [...]

  33. robert d says:

    To Barry and Merrill Man
    Barry, you can go back and check my email
    to this site and see where i wrote you on the day
    you appeared on Yahoo Breakout and also on
    Bloomberg to diss BAC. That was twice in one day
    in December.
    To Merrill man, I have never owned BAC before.
    In fact, Barry, i emailed you one other time to
    point out the XLF as a BUY between 12.50-12.75.
    I am afraid that you are too much in the past.
    It’s clearly a new day and you are playing yesterday’s
    losers. It is over. Your book has ben printed. You were
    the guru for that period. It is time to move on.
    And i say that as a viewer and reader who respects you
    immensely. As you know the markets change, and we
    all must change with them.
    As for Merrill Man, I would be delighted to match my account
    over the last decade with you. I am an open book.
    And, by the way, I too was a Merrill man from 1973 to 1984
    and was one of the very top producers at that time….all the
    plaudits, Chairmans Club, trips, etc etc. And I have never
    read nor written on the Yahoo gossip boards.

  34. BAC also ordered Merrill broker compensation changed —

    They redefined what is a Institution and what is a individual account. So if you are a MER client and you own a dry cleaner or a small business owner with a 401k, they tag you as Institutional and lower the payout to 20%.

    It has been since put on hold . . .