Bank of America is shopping online for customers who are not quite wealthy enough to make the cut at Merrill Lynch, posing a threat to entrenched discount brokers and making some of the thundering herd at Merrill see red.
The largest U.S. bank, which has 5,900 branches and $1 trillion in deposits, created an online brokerage service last June called Merrill Edge as a key pillar of its strategy to woo the so-called mass affluent client with $50,000 to $250,000 to invest.
Major brokerage firms for years have shunned that stratum in favor of wealthier clients who generate fatter fees and buy more high-margin products. That's sent the mass-affluent to regional firms and to discount brokers such as Charles Schwab Corp , E*Trade Financial Corp and TD Ameritrade Holding Corp.
Now Bank of America wants those lower-tier customers back in its herd, while encouraging Merrill brokers to corral funds of wealthy clients who use outside discounters for some trades.
Merrill Edge gibes well with Bank of America's big base of savings and lending relationships, analysts say, and is the flip side of the bank's push to have brokers sell mortgages, insurance and other banking products to their brokerage clients.
This gets them into a part of the market that's expanding rapidly, said Marty Mosby, a bank analyst with Guggenheim Securities LLC. The question is whether you'll see that translate into accounts and lending.
Commercial bankers clearly see the mass affluent as a core part of their future growth. According to a fourth quarter 2010 survey of bank executives by Boston-based Aite Group, 58 percent are putting a high priority on the sector.
FAR TO GO
Since its roll-out in June, Merrill Edge has amassed $90 billion in assets, well below the $1.57 trillion at online leader Schwab.
Merrill's total includes $70 billion already with the bank from its purchase more than a decade ago of the Quick & Reilly discount broker as well as the assets of Merrill's call-center clients who were weaned from their broker relationships as the firm went upscale.
Bank of America bought Merrill Lynch during the financial crisis in January 2009 for $19 billion, and hasn't always fit comfortably into the new structure. Merrill Edge is meant to bridge some of the gaps between low-tier retail banking and the high-end private banking and brokerage services at Merrill and BofA's U.S. Trust.
This is a strategy for retaining assets that would otherwise go to other online competitors, said Sophie Schmitt, an analyst with Aite Group. She estimates that roughly a third of Merrill's clients have online brokerage accounts elsewhere.
Lyle LaMothe, head of Merrill Lynch's U.S. brokerage business, says the strategy is to induce clients to migrate from Edge to full-service advisers as they accumulate wealth.
Whereas an E*Trade will say you want to deal with us this way all the time, we're looking at the lifetime progression cycle, he said in an interview.
Some Merrill brokers, however, chafe at having their employer dangle lower fees before current and prospective clients. Even more irritating for some is that they are being told to actively steer lower-echelon accounts to the lower-cost platform.
From the parent company's perspective, the effort has had some early success. Since the launch, 8,000 401(k) accounts at Merrill have been transferred to Edge.
The migration is an extension of a broader push at Merrill, Morgan Stanley and other big brokerages to penalize clients who keep less than $250,000 in their accounts by levying maintenance and other fees. At the same time, the firms have been lowering or even eliminating payouts to brokers who serve those clients, a development that brokers say is particularly onerous for those in less wealthy localities.
Executives at Bank of America counter that the splitting is good for clients and brokers.
What we've been very clear with is it's easier to grow your business when you're not losing relationships for poor service, LaMothe said.
Bank of America recently moved Merrill Edge from its wealth and investment management division, led by Sallie Krawcheck, to its consumer banking unit, run by Joe Price.
We want them to be in a channel where they are getting the level of attention they certainly deserve, and that just happens to correlate most often with households that are under a certain size, LaMothe said.
The message to brokers may be taking hold, according to Aite's Schmitt.
Initially, financial advisers were very hostile to this initiative, but now they're starting to see that clients are not moving, she said. They are starting to see that providing clients with more choice makes them happier.
Bank of America, meanwhile, sees Edge extending its push for cheap funding by attracting low-cost deposits.
To attract customers to the concept, the bank last month subdivided its deposit account menu into four categories, with a host of perks -- including special rates on money market and CD accounts -- to customers with at least $50,000 in deposit and brokerage accounts.
BofA Chief Executive Brian Moynihan last month singled out wealth management as one of the few remaining opportunities the company had for growing its U.S. consumer business.
Banks want to show asset growth at this stage in the industry's recovery, but assets are going to be tough to come by, said Paul Miller, a bank analyst with FBR Capital Markets. Everybody's looking at some area or niche to focus on. At Bank of America's, it's going to be the mass affluent.
(Reporting by Joe Rauch; Additional reporting by Joseph A. Giannone in New York; Editing by Jed Horowitz)