What on earth was Merrill Lynch thinking when it unleashed its new online discount brokerage this summer? The platform, Merrill Edge, made some of its 15,000-plus financial advisors uneasy. Fear of business cannibalization spread like wildfire through the ranks. Numerous analysts dismissed Merrill Edge as a marketing gimmick. But Wall Street’s latest discounter—created from the combined technological, product and legacy platforms of Merrill and its parent Bank of America—is a formidable challenger to the discount players like Charles Schwab, E*Trade, and TD Ameritrade, according to some experts.
The idea is to convince current clients to give them the “play” money they have parked at the discounters, which can amount to substantial sums, and to capture the hearts and minds of young people who have yet to amass their wealth. We’re talking serious dollars here. At stake is a coming intergenerational transfer of wealth—the evolving wealth of today’s 87 million-strong, 20-something “millennial” population, born between 1979 and 1999. This wealth is projected to grow from $172 billion today to a staggering $13.4 trillion in investable assets (liabilities reaching a shocking $16.2 trillion) by 2030, according to internal Merrill research.
These millennials are wired on Starbucks coffee and do-it-yourself investing; they invest online the same way they play on social networking sites: with savvy.
The Discount Strategy
In this light, Bank of America’s launch of Merrill Edge has great potential for success, says Chris Brown, an analyst and principal at Sway Research. Some Merrill executives, deferring to the sensibilities of FAs, like to carefully call it the “relaunch” of what already existed under Banc of America Online Investing. But Merrill Edge is a far more powerful product, with a wider array of banking and brokerage services.
“The younger generation have been kind of left to their 401(k)s, the Fidelities and Schwabs,” Brown says. “Now some full-service firms, Merrill being the first, realize if they don’t market their services a little more proactively to younger investors, down the road they could lose them.”
Brown should know. He’s a former broker who, with colleague Laura Varas, has conducted extensive research on the habits of younger investors. They typically have $100,000 in assets to invest. He says if Merrill can capture a critical portion of the group, the big payoff comes later. That’s the challenge. Merrill must transition these millennials years hence, as their wealth expands, into full-service relationships at Merrill—a second act that would certainly assuage its advisory workforce about the threat of Merrill Edge.
“Cannibalization could be a concern except that all of our businesses are growing,” says Lyle LaMothe, head of U.S. Wealth Management. “Cannibalization implies one comes at the expense of the other, but that is not the reality here.”
The reality is that Merrill has, in effect, declared open warfare on Chuck Schwab and its discount brokerage peers. “This platform can stand up against these other players in a space where we were not previously competitive,” says Dean Athanasia, head of Credit, Banking and Merrill Edge for Bank of America Global Wealth and Investment Management (Athanasia reports directly to Global Wealth's president, Sallie Krawcheck.)
“We have an offering for younger investors at the low-end of their life cycle that can compete against a Schwab, Fidelity, Ameritrade,” Athanasia adds. “We cultivate those clients and make them familiar with Merrill Lynch early on. We don’t wait to reach them when they are into their late 40s and 50s, when they have accumulated more wealth.”
The numbers stack up well for Merrill. Athanasia notes that Bank of America has close to 60 million consumer clients, 14 million of which are regarded as affluent individuals with $250,000 or more in assets. Some 500,000 clients had brokerage accounts at Banc of America Online Investing. “That 14 million doesn’t currently have services from us here right now,” Athanasia says. Many others from Bank of America have assets of $250,000 or less, which is the group Merrill Edge is especially targeting.
In late June, some 500,000 of Banc of America Online Investing’s customer accounts started life anew as customers of Merrill Edge, the successor discount brokerage system of Merrill Lynch’s Merrill Direct. Bank of America customers with a financial advisor joined Merrill Lynch Wealth Management. They can view their accounts online, via MyMerrill, which was launched in 2009. (And they can, of course, play around on Merrill Edge.) Merrill renamed its phone-based advisory center the Merrill Edge Advisory Center, which is separate from the Merrill Edge self-directed accounts side, as it continues to provide advice from a team of advisors for clients with $20,000 to $250,000 to invest who do not want a full-service relationship.
Analysts say Merrill’s online brokerage business is small compared with the likes of Charles Schwab. Schwab had client assets at the end of the second quarter of $1.36 trillion, and 7.9 million brokerage accounts. Merrill Edge accounts exceed 1.16 million with over $48 billion in assets, a fraction of its $1.45 trillion in total client assets. Still, Athanasia says there has been a ten-fold increase in Merrill Edge activity–from mere visits to accounts opened—since it was launched on June 21. He declined to be more specific.
A Discount Offering, Really?
Some are skeptical that Merrill Edge will make a splash in online brokerage. “This is primarily a rebranding of what Merrill already had in place between the Merrill and Bank of America platforms,” says analyst Patrick O’Shaughnessy of Raymond James. “There’s probably more pressure on the advisors to promote this type of product to customers. But I don’t see it moving the needle all that much for the overall industry.”
The established discounters have so far shrugged off Merrill's challenge. A spokesperson for Charles Schwab says the firm doesn’t see Merrill Edge as serious competition, adding, “We don’t see it eroding any of our market share in the discount brokerage space.” A spokesperson for E*Trade says its “ongoing investments will allow us to continue to compete effectively with both online and traditional brokers.”
Kim Hillyer, a spokeswoman for TD Ameritrade, in an e-mailed statement, says: “New offerings come and go, and, while we do monitor them, we’re focused on TD Ameritrade and our growth.” She says: “At the end of the day, we want to help our clients become better investors—young, old, high assets, low assets, beginner or advanced. It doesn’t matter to us. That’s the beauty of our model.”
Top Merrill Lynch executives hardly regard Merrill Edge–which offers new tools and services—as a simple rebranding exercise. “We want to reshape the entire industry,” says Alok Prasad, managing director, Merrill Edge. “We are fundamentally redefining our own space at some level.” The plan, come early 2011, is for Bank of America to shift gears into a hard-sell marketing campaign for Merrill Edge. “I am comfortable saying that while January  in some way represents a kick-off, of sorts, the effort is not going to be over by February,” says LaMothe. “We are going to stay with it continuously, as necessary.”
Of all the noticeable features of Merrill Edge, the pricing model is one that stands to lure business from Schwab and the other discounters. On balances of at least $25,000, clients get 30 free stock or ETF trades each month, which qualifies plenty of Merrill clients today. After the free trades, clients pay charges ranging from $4.95 to $8.95 per trade. Then there is Bank of America’s extensive range of bank products, lending and credit services coupled with Merrill’s existing products such as in-house research. “If you are an advisor at Merrill Lynch looking at this, you see an unbelievable suite of products between banking, the cash investment products, credit and lending, and now you have this other solution, called Merrill Edge,” says Athanasia.
Lisa Kent, a veteran Merrill Lynch FA in Princeton, N.J., acknowledges the nervousness among her colleagues when Merrill Edge was first unveiled. But it was the same kind of fear, she recalled, that greeted the Merrill Lynch Advisory Center earlier in her career. And that worked out just fine for advisors, she says. There was no cannibalization. Besides, when Merrill FAs have clients who self-direct some business to Merrill Edge, that business is still counted in the calculation of the FAs’ compensation.
Ten years ago, says LaMothe, it was a one-way flow into the Advisory Center. “But now for years, literally, we have had hundreds of millions of dollars in client relationships migrate back to the advisory business [from the Advisory Center],” he says. “Because as [Advisory Center] clients’ financial resources have grown, and as their lives became more complicated, they wanted the advice of our advisors.”
Kent, who has worked at Merrill for 29 years and has around $225 million in assets under management, describes one wealthy client who recently decided to self-direct a portion of his retirement money on Merrill Edge. “I wasn’t surprised nor was I disappointed at my client who peeled out a quarter of his portfolio and sent it in that direction, to Merrill Edge. He is happy, I am happy, and he is well served,” she says.
A Merrill FA says that many Merrill clients have multiple accounts with different firms. “A client may have one million dollars with us and $50,000 at E*Trade,” he says. “We want to bring that $50,000 over here to Merrill.” Another Merrill executive says its wealthy clients are playing with “millions and millions of dollars” across numerous discount platforms operated by competitors.
Other Merrill FAs are less pleased. On this magazine’s online forums, one Merrill FA concluded, “It ain’t good.”
Athanasia says Merrill’s pricing model, though competitive, was not purposely designed to compete with the discounters on price alone. The vast majority of Merrill customers qualify for free monthly trades, so the idea was to cultivate and expand relationships. This includes tapping family members and children of existing clients and plugging them into the accounts. “What we are trying to do is foster a planning-based advisory business that is aligned with an investor’s life cycle more than the market cycle,” says LaMothe.
Merrill Lynch’s research and focus groups have shown that many clients, younger clients particularly, want more “control” over their accounts, according to Prasad. “If clients want to do it themselves, to be self-directed or, alternatively, if they want advice, they can get that too,” he says.
The Discount Threat
Adam Honore, research director at Aite Group, had words of encouragement. In a poll of advisors, he found that 31percent considered online brokers a threat to their business The average FA had lost slightly more than 7 percent of his clients to online firms in the past two years; some 6 percent lost an astonishing 25 percent to 75 percent, according Honore. The launch of Merrill Edge was, therefore, a clever strategic and defensive move by Merrill to stem any potential loss of assets to the discounters, according to Honore.
Brown says the bundling of Bank of America’s banking services and Merrill’s brokerage offerings is “step number one” for Merrill Edge. “The harder step is converting these online clients into full-service relations,” he says. “But it can be done because, as our research has shown, these online services can build a lot of loyalty among younger investors.” Adds Honore: “The FAs at Merrill should be happy about Merrill Edge.”
LaMothe sees Merrill Edge as a validation of the marriage of Bank of America and Merrill in September 2008, which many described as a shotgun affair. “Some years hence, people are going to point towards this as one silver lining in an otherwise pretty difficult period of time.”