Looking out from the Advest offices on the 24th floor of 1 Federal Street in the heart of Boston's bustling financial district, you can see sweeping views of the historic harbor. Turn away from the windows, and you see a less inspiring sight — empty desks in what's left of the office where 19 brokers once made this a top branch in Advest's network. Today, only four Advest brokers remain. “It looks like a bomb went off,” says Tom Tate, a former broker in the office.

Tate and his 14 colleagues are part of a mass exodus of talent from Advest since Merrill Lynch announced plans to acquire the 108-year-old Hartford-based brokerage last September. Similar levels of defections have occurred in the firm's Rockefeller Center office in New York, its Glastonbury, Conn., office and in branches across the Northeast. According to an analysis of NASD records by Registered Rep. and StockBrokerShop.com, a service that sells leads to recruiters, at least 417 registered individuals — out of 515 — have left since the deal was announced. That's an 81 percent attrition rate.

Officially, Merrill maintains that the merger — its first acquisition of another brokerage since buying White Weld in 1978 — has worked as planned. “We didn't retain as many FAs as we wanted to, but it's still a very solid deal for us,” says Merrill spokeswoman Jennifer Grigas. She points out that not all of the lost reps were producers — some were sales assistants and nonproducing complex managers. But she declines to provide further detail. And, she asserts, “We did an even better job on retaining client assets.”

Grigas declines to say how much of the client assets that Advest had when the deal was announced — an estimated $37.5 billion — remain at Merrill; recruiters say that hiring firms expect experienced brokers to lose no more than 30 percent of client assets when they change shops. And reps from regional firms like Advest tend to hold onto clients better than wirehouse reps, they say. Tate says that the only nonproducing reps he knew of were a dozen or so complex managers.

A Great Deal?

Last Sept. 14, when the deal to buy Advest from French insurer AXA was announced, it was regarded as a savvy transaction. “Merrill got Advest for a song,” crowed one analyst. The $400 million pricetag represented just 1.25 times Advest's equity, which Keefe, Bruyette & Woods analyst Lauren Smith wrote, “would be at the low end of historic transaction valuation ranges for broker/dealers.” It also worked out to just $776,000 per broker.

Eight months later, with about 100 reps left, the deal math looks considerably worse: The price per broker soars to $4 million. And assuming that the departing reps — who have fetched up at places such as Morgan Stanley, UBS, Smith Barney, Wachovia, Raymond James, A.G. Edwards and Bear Stearns — were able to hold on to 70 percent of their books, the $400 million may have netted only $11 billion in assets under management. “This will go down as a case study that even Merrill Lynch itself will examine on how to screw up a takeover,” says Danny Sarch, a recruiter and founder of Leitner Sarch Consultants in White Plains, N.Y.

“I just don't think [Merrill has] honed their skills in making acquisitions,” says Dick Bové, a securities analyst who follows Merrill at Punk Ziegel. “It's going to have to do a better job than it did with Advest. Clearly, this was a misstep.”

While the cost of the all-cash deal is a mere rounding error for Merrill, which earned $5.2 billion on $28 billion in sales last year, the loss of so many brokers raises questions about Merrill's stated growth strategy in retail brokerage. Vice Chairman and President of Merrill Lynch's Global Private Client Group Robert McCann, who returned to Merrill in August 2003 after a brief stint at AXA, announced in early 2004 that he expected to expand his army of brokers — already the largest on the street — by 5 percent annually, primarily through recruiting, but also via acquisitions.

When Cultures Collide

Since then, recruiting has become more cutthroat and firms are outbidding one another with lush bonuses to get proven producers. That makes acquiring regional broker networks a potentially cheaper option. The firm continues “to weigh other acquisition options in the regional space,” spokeswoman Grigas said via email. And, in Merrill's recent annual report, CEO Stan O'Neal told shareholders to expect such deals.

So, what went wrong with Advest? Advest refugees and recruiters cite a variety of factors, including a middling retention bonus to post-merger distractions at Merrill to a fundamental culture clash.

Indeed, it was never clear how the tiny regional brokerage would fit into the vast Merrill retail machine. Established in 1898 by a group of young entrepreneurs to assist electrical utilities with financing, Advest later became a conglomeration of investment firms headed by Hartford businessman William Putnam. Advest offices spread across New England and the Northeast and into the Midwest and Florida with two-, three- and four-broker offices that catered to middle-class investors. The company retained a collegial, low-pressure culture, even after its IPO in 1980 and subsequent acquisitions in the 1990s by insurers (first by The MONY Group, then by AXA).

Advest reps say they weren't surprised to be sold again, but were puzzled when they learned the buyer would be Merrill, which they saw as emblematic of everything Advest was not — gigantic, aloof, mechanistic. It did not take long for their fears of a mismatch to be confirmed. The top question on everybody's mind was what the retention package would look like, but there was no word from Merrill headquarters. “There was a long period between announcement and the retention packages,” says one former complex manager. “Their silence was deafening.”

Merrill brass might have been more responsive if they had not been absorbed in a major reorganization of their own branch system, which was also announced in September. As a result, Advest reps and branch managers say they were not clear about whom they were reporting to. And the integration of Advest brokers was stalled as new regional managers settled into their new roles. “That prevented branch managers and regional directors from reaching out to Advest brokers,” Sarch says.

When the final retention plan arrived — on Nov. 18 — the first big wave of defections began. “It wasn't competitive with what was being given out on the Street,” says one member of a former Advest team with more than $1 million in production. The deal for the top producers — those generating above $1.5 million — was 50 percent of trailing 12-months production. For the rest of the Advest crew, there was a sliding scale that went as low as 10 percent.

Brain Drain

A former Merrill branch manager concedes that the deal “wasn't as juicy as the ones other firms were offering.” The terms were similar to what Smith Barney was offering to Legg Mason brokers, according to recruiters. But there was a key difference: In the Legg deal, the acquirer had additional leverage — three more years of exclusive access to the Bill Miller funds that so many Legg clients were in.

Meanwhile, top Advest producers could get as much as 100 percent of trailing 12-month production to sign up at rival Wall Street brokerage houses. “Merrill's big mistake was underestimating how aggressive the rest of the Street would be in going after Advest brokers,” Sarch says.

It didn't take long for many top Advest brokers — the type that actually have the Merrill Lynch high-net-worth focus — to find better offers. “The majority of the top producers have left,” says one former Advest broker.

According to Grigas, Merrill was “able to retain a high number of those Advest advisors whose business models are best suited for success on the Merrill Lynch platform.”

Still, there were many high-profile losses, like Maurice “Mo” Bradshaw, a $2 million producer, who took his book to Bear Stearns in December 2005. And the Glazer Group — Lloyd, his son Larry and Steve Dimitrio — a team with $122 million in assets and roughly $1.5 million in production, which left for Wachovia's independent platform in November. David Schneeweiss, another million-dollar producer, also joined Wachovia in November. The entire Portland, Maine, office followed branch manager Clifford Dow and his family into a new independent b/d. Raymond James & Associates picked up Brent Bruckner and Al Daft, a million-dollar producing team in Canton, Ohio, and the $2 million-plus team of Walter Lunsford and Tim Recker in Cincinnati.

Mark Bilski, a top producer in Valhalla, N.Y., joined Credit Suisse in New York, and Paul Skydell and Harold Cohen, a $2 million team in Jericho, N.Y., joined UBS. Malcolm Berko, a top producer in Boca Raton, Fla., packed his things for Moors & Cabot in December. Heavy hitter Harry Canavisi opted to go to a UBS office in Pittsburgh. Veteran broker Paul Hipsky of the Glastonbury office joined nearly 50 Advest reps who shifted to RBC Dain Rauscher.

My Way

Former Advest brokers who were contacted for this story — and requested anonymity, citing fear of litigation — say that money was not always the motive for leaving. Many, in fact, concede that they might have done better financially in the long-term at Merrill. But they preferred to continue doing business the way they had done for years at Advest.

Merrill is in “a different line of work than we're in,” Tate says. “The emphasis at Advest is that you work for the client. The emphasis at Merrill is you work for the firm. We weren't sales people.” While most Advest brokers had migrated to some level of fee-based business, they were still free to do as much transaction business as they wanted. Advest reps say they could run their practices largely as they chose to and were not pressured to hit mandated asset targets or eliminate small accounts.

Advest alumni say that one thing Merrill made clear from the start was that they would have to do things the Merrill way — including relegating smaller accounts to call centers. Advest reps were told that, within a year of the merger, all client households with less than $250,000 in investable assets would be moved to a call center. While the clients would still be theirs, the brokers would no longer collect fees. “The thought of shipping clients to a call center was not palatable to these guys,” says a former complex manager.

Another alien concept, Advest reps say, were Merrill's restrictions on product choices. One rep says he bristled at no longer being permitted to sell clients the variety of 529 college savings plans he had used successfully at Advest. At Merrill, he was told that he could only sell the Maine NextGen plan, because it contains Merrill funds. Morningstar has ranked the Maine plan among the five worst, because of its high fees and middling performance.

Merrill got a cool reception, too, when Advest brokers were introduced to its “level-loading” policy: They would get a flat 4 percent commission on all mutual fund sales, regardless of what the money manager paid. Reps who did a big business in annuities, which pay up to 6 percent, faced a significant drop in income. “The haircuts on some of these products were enormous,” says one former Advest complex manager. Advest reps say they were told that level loading is standard firm practice, intended to avoid charges by clients and regulators that reps recommend funds or types of investments based on their personal compensation. Merrill declined to comment on its compensation policies.

The prospect of having their practices Merrillized was daunting, particularly for old-timers. At 74, Bernie Taradash, the No. 8 producer in the firm and a recent salesman of the year, had no interest in remaking his transactional business. So, after 48 years with Advest in Fall River, Mass., he moved to Oppenheimer in February.

“The culture of Advest was destroyed,” says one former Advest broker whose team was generating more than $1 million in production last year. “It was the worst possible deal for Advest employees because nobody wanted to leave.”

Merrill may soon have an opportunity to see if it can do better. Merrill and its rivals are on the prowl for more asset-gatherers at a reasonable price. And rising cost pressures on smaller firms is creating sellers. “Sooner or later a lot of these smaller firms are going to get acquired,” says André Cappon, president and founding member of the CBM Group.

That means more Merrill-Advest type combos — like the $500 million deal that UBS struck in April to buy Piper Jaffray and its 800 brokers (see story on page 21). When that deal closes, the half-dozen former Advest reps who found their way to the Minneapolis-based regional will find out if the Swiss giant, the No. 4 U.S. wirehouse, can show a little more post-marital finesse.

MARITAL MISMATCH?

Vital stats for Merrill Lynch and Advest, including client assets, FA production and fee-based business.
Advest Merrill Lynch
Client Assets $37.5 billion $1.5 trillion
Average Production per Rep ~$510,000 $734,744
Fee-based Revenue as % of Total ~40% 52.3%
Source: Merrill Lynch and Registered Rep. research

PICKING UP THE PIECES

Top five recruiters of Advest reps.
Firm Advest Reps Signed Percentage
RBC Dain Rauscher 48 11.5%
Wachovia 44 10.6
Jesup & Lamont 23 5.5
Morgan Stanley 21 5.0
UBS 19 4.6