Why BofA can’t tell Merrill brokers what to do

By Felix Salmon
February 16, 2012
Joe Giannone has scored a fascinating interview with Lyle LaMothe, the former head of Merrill Lynch's Thundering Herd.

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Joe Giannone has scored a fascinating interview with Lyle LaMothe, the former head of Merrill Lynch’s Thundering Herd. As John Carney says, the interview makes it very clear, as was suspected at the time, that he left because he was very uncomfortable with edicts surrounding synergies and cross-selling and the like after Merrill Lynch was bought by Bank of America.

While Merrill Lynch and LaMothe said that brokers are not forced to pitch loans and banking products, a number of Merrill advisers complain of feeling such pressure at a company that emphasizes cross-selling, one reason many former brokers have said they left Merrill over the past two years.

LaMothe says combining bank and brokerage under one roof “makes perfect sense,” but there are limits. “You cannot pressure good advisers to sell a product: they simply won’t do it. It’s almost counter-productive.”

This is interesting to me because Merrill’s brokers charge their clients a whopping $13.5 billion every year, or 0.90% of their total assets. And that fee, of course, comes over and above the fees charged by the fund managers chosen by those Merrill brokers and their clients. If you’re using Merrill mainly just to invest in index funds, then there’s a good chance that your brokerage fee is five times the amount of money you pay to the institutions actually managing your money.

Sometimes, it’s very obvious when your Merrill broker is making money from you. But other times, it’s not obvious at all — fancy derivatives products, or principal-protection strategies, or front-end loads on hedge funds, or just about any fund-of-funds, or all manner of other products, involve secret or semi-secret kickbacks straight to the broker who buys them. And those kickbacks work: brokers really are more likely to sell products they get a commission for selling, and given the choice between selling different share classes of the same fund, they’re pretty likely to choose the class which rewards themselves the most.

Yet at the same time I think that LaMothe is at least partially right when he says that it’s hard to pressure good advisers to sell a banking product. How can that be, when incentives clearly work with respect to investment products? I think there are three dynamics at play here.

First is the fact that much of what Bank of America wants brokers to cross-sell simply doesn’t come with commissions at all. If you don’t pay brokers extra to sell BofA products, then they’re not going to do so.

Second is the fact that the brokers might be loyal to Merrill Lynch, but they feel no great love for Bank of America. Ask them to push BofA products without earning their loyalty first, and they’ll feel used. Brokers have a wide range of products to choose from, many of which carry high commissions. They don’t all flock to the same high-commission products, though: some love this one, others love that one. With BofA products, there’s not much love to go around — and as a result, the brokers tend to avoid selling them.

Finally, and most importantly, brokers feel that they’re working for their clients more than they’re working for their employer. Its the clients who ultimately pay them, and they generally have a great relationship with that client. What’s more, just like nearly everybody else, brokers feel that they earn a reasonable sum for the work that they do. When they get a nice commission on a trade, they don’t feel that they’re ripping off their client, they just feel as though they’re being paid for doing their job. After all, they have to get paid somehow.

In a broker’s mind, earned commissions are all part of the ecosystem of serving clients. Cross-selling, by contrast, sets up a conflict of interest — not between the broker and the client, but between the client and the broker’s parent company. When selling a third-party product, the broker is working wholly for the client. But when selling BofA products like banking or insurance, it’s less obvious who the broker is working for. Being a salesman for a product that you’ve carefully chosen? That’s fine. Being a salesman for a product that you’ve had thrust upon you and you’re being told to sell? You’re going to feel much less happy about that.

Which is one reason why brokers find it so easy to flit from shop to shop, and why it’s so hard to get them to sell your own company’s products in particular. Bank of America might paradoxically find it easier to sell its products through independent, third-party brokers than through its own Merrill Lynch salesforce — just because the Thundering Herd hates being told what to do. And if you push it, the guy in charge is prone to “retire” at age 49, rather than follow your edicts.

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