In the Battle of the Big Brokers, Merrill Is Winning

(page 2 of 2)

The large size of Merrill Lynch compared with Bank of America's brokerage unit made combining forces easier than at Morgan Stanley, which had to integrate two similarly sized operations with a lot of overlap, says Guy Manuel, founding partner of CBM Group, a New York consulting firm. Merrill Lynch had 16,000 brokers in September 2008 when its sale was announced. Charlotte (N.C.)-based Bank of America had about 2,000.

Morgan Stanley's absorption of Smith Barney "is probably not going as well as they originally thought," says Douglas Sipkin, a New York-based analyst at Ticonderoga Securities. Gorman said in February that the brokerage would have $450 million in integration costs this year, after $280 million in 2009. He said he expects a minimum of $1.1 billion in cost savings at the unit by 2011.

Merrill Lynch also has a lead in cross-selling. It has 800 bankers assigned to persuade brokerage clients to take out a mortgage from or move money to Bank of America, the largest U.S. lender by assets, resulting in 80,000 sales of banking products in the second quarter compared with 35,000 in all of 2009, according to a regulatory filing. "There's more of a natural referral flow at Bank of America and Merrill Lynch," says Douglas G. Ciocca, managing director at Renaissance Financial in Leawood, Kan., which manages $2 billion.

To close the cross-selling gap, Morgan Stanley hired 100 bankers to offer loans and deposit products to brokerage clients. The unit may quintuple its ranks by the end of 2011, a person with knowledge of the strategy says.

There may be more at stake in the broker battle for Morgan Stanley, which got 36 percent of first-half net revenue from wealth management, than for Bank of America, which relied on the Merrill Lynch brokerage for 10 percent of net revenue. Yet neither company can afford to slip. Wells Fargo (WFC), the third-largest full-service U.S. brokerage and a leader in cross-selling, has almost as many brokers as Merrill and oversees $1.2 trillion in client assets.

Merrill, Morgan Stanley, and Smith Barney controlled 25 percent of the industry assets under management in 2009, down from 32 percent in 2007, figures compiled by Cerulli Associates show. Independent advisers and regional broker-dealers have increased their percentage of assets to 32 percent from 28 percent in 2007. "Competing in this world is much different than it was in the 1980s and the 1990s," says Anthony DeChellis, head of Credit Suisse Group's (CS) private banking Americas business. "Clients are getting better at choosing the firms where they can get the best advice and the best guidance."

The bottom line: Merrill Lynch earns higher profits with fewer advisers, thanks to a smooth integration with Bank of America and more cross-selling.

Moore is a reporter for Bloomberg News. Mildenberg is a reporter for Bloomberg News.

Business Exchange

Track and share business topics across the Web.