|
Eyes on the prize: the superrich
|
 |
February 14, 2002: 11:18 a.m. ET
Picking the richest of the rich as clients has been a part of Merrill's success.
By Suzanne Woolley with Amy Feldman
|
NEW YORK (Money Magazine) - The great strength -- and also the curse -- of Merrill Lynch is its vast army of brokers. In a bull market, when everybody wants to buy stocks and funds, this distribution network is a matchless asset. Trouble is, Merrill must provide these brokers with everything from offices to insurance, whether or not they're selling -- and in today's environment, sales are excruciatingly slow.
With revenue in a deep funk, Merrill's outsize costs have turned into a lead weight. The company's return on equity -- a measure of how efficiently it uses shareholder money -- sank from 24.2 percent in 2000 to a woeful 11.7 percent in 2001. By comparison, Morgan Stanley's return on equity was 19 percent in 2001 -- down sharply from last year's 30.9 percent, but still way ahead of Merrill.
The challenge for O'Neal is to reverse this slump, in large part by squeezing more profits out of his costly sales force. That means pushing brokers to focus on the most lucrative areas of their business. And so it is that on a cold, clear January day, a team of financial advisers has gathered in a windowless conference room at a Merrill Lynch office in Boston.
Led by Raj Sharma, they boast more than half a century of experience in investing, taxes, insurance, trusts, accounting, philanthropy, derivatives and risk management. The focus of today's meeting: a 69-year-old retired bank executive and his 63-year-old wife. Or, more to the point, their $68 million portfolio - 95 percent of which is riding on just one stock and none of which has been subjected to any financial planning.
Over the next hour and a half, Sharma's team maps out a diversification strategy, recommends setting up a family foundation, a charitable remainder trust and 529 education accounts for the couple's four grandchildren, and discusses refinancing the $700,000 mortgage on their house on Beacon Hill.
Customers like these are at the heart of O'Neal's strategy for Merrill. Instead of squandering resources on smaller fish, O'Neal wants to focus increasingly on high-net-worth investors both here and abroad. Merrill already has more U.S. clients with $1 million than any other financial institution, and there's plenty of room for growth. There are 2.2 million American households with liquid financial assets of more than $1 million, and nearly 100,000 households with $10 million or more.
Brad Hintz, who follows the securities industry for Sanford C. Bernstein, expects Merrill to grab an increasingly large slice of this pie. "Merrill's great strength," he said, "is dominating the high-net-worth individuals in America and very much tying them into the Merrill Lynch system."
Not everyone sees the path as so easy. Robert Elliott, a senior managing director at Bessemer Trust, where the minimum account is $10 million, argues that it's tough for a firm like Merrill to attract exclusive clients while also serving less wealthy investors. "If you have a low-end strategy coupled with a high-end strategy," he asked, "how are you perceived by the market?"
Other banks and brokers have sought to combat this problem by creating or buying boutiques to serve high-end clients under a more exclusive brand -- Charles Schwab with U.S. Trust, Wells Fargo with Lowry Hill, Legg Mason with Private Capital Management. O'Neal is betting instead that the Merrill brand is mighty enough to attract not just the well-heeled but the seriously rich. James Gorman, president of Merrill's U.S. Private Client Group, boasted that the firm is already winning this battle: "We are massive in the ultrahigh-net-worth business in a way nobody else is. There are other big players, but we are massive."
O'Neal's emphasis on targeting high-end investors began when he headed the brokerage division. Back then, he divided the business into four segments: Merrill Lynch Direct for do-it-yourself investors; a call center staffed with "financial advisers" for accounts under $100,000; "wealth-management adviser" teams for clients with assets above $100,000; and "private wealth adviser" teams for clients with $10 million and up.
In other words, the more money you brought to Merrill, the more personalized service you received. Already, about a million smaller accounts have been shifted into the call centers, and this has freed up Merrill's brokers to concentrate on richer clients who generate juicier fees. In the past, said Gorman, Merrill tended to "treat everyone exactly the same. That's ridiculous. If you treat someone with $50,000 the same as someone with $5 million, you overserve one and underserve the other."
O'Neal has also intensified a push to have financial advisers with complementary skills work in teams -- a strategy designed to improve client retention, since the client forms a relationship with more than one person. About 30 percent of Merrill's advisers now work in teams, and O'Neal aims to boost that number to 50 percent within 18 months.
Most important, O'Neal has also continued to impose stricter financial discipline on the brokerage division. While running the unit, he cut its head count by 13 percent and reduced operating costs by $800 million. Profit margins rose, even as revenue shrank -- a feat that helped catapult him into the top job.
To alter the way his brokers operate, O'Neal has revamped the way they're paid. These changes have given brokers stronger financial incentives to chase rich customers. "We are trying to emphasize dealing with larger clients, with less emphasis on volume of turnover of smaller accounts," said O'Neal. Indeed, Merrill no longer pays brokers for trades they make in accounts worth less than $100,000.
"They're paying people more for doing bigger tickets," said Mark Elzweig, a brokerage recruiter. "In essence, they're saying, 'We want you to do business with higher-net-worth customers, regardless of whether it's transaction-based or fee-based.'" Under O'Neal, Merrill's brokers have also been encouraged to sell more products like hedge funds and customized separate account portfolios, since these provide the firm with recurring fees, instead of just a one-time sales commission.
Of course, this raises a thorny question that has long dogged the brokerage industry: Are brokers really doing what's best for their customers or merely selling products that profit themselves and their employer? O'Neal acknowledges the potential conflict.
"Making sure that the interests of the client, the financial adviser and the overall business are in alignment is a very, very complicated process," he conceded. "I can tell you that I've never dealt with a more complex topic than financial adviser compensation."
Page 4: Read more on what Merrill's future holds.
-Additional reporting by Adrienne Carter 
|
|
|
|
|
|
|
