Humbled But (Somehow) Triumphant
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Of course, there is always independence — and not just for Merrill advisors, but for wirehouse guys from all over. “I think that any time you really shake it up as much as you are right now, you will definitely have more people looking for alternatives to the wirehouses,” says Danny Sarch, a recruiter with Leitner Sarch Consultants. “The law of numbers dictates that there will be wirehouse guys who are interested in all of the above: RIAs, regionals and independent b/ds. It's a tremendous opportunity for people looking to hire.”
Sarch and other analysts concede that only a small percentage of those considering leaving wirehouses will seek an RIA solution, because so few wirehouse advisors have all-fee books of business. But, on the other hand, “Two years ago, you never?heard about mainstream brokers of substance moving to RIAs. Now you do. I think most Merrill people are open to seeing what is out there, while taking?a wait-and-see attitude about the retention package.”
According to Fidelity Investments, 55 “breakaway brokers” — financial advisors who have left one of the five wirehouse firms — with $7 billion in client assets joined the firm's growing RIA empire (Fidelity Institutional Wealth Services) in the first six months of 2008. That's more than double the assets breakaway brokers brought over to Fidelity in all of 2007. Meanwhile, Schwab's RIA custodian, Schwab Institutional, is also having a banner year. The firm says net new client assets for the first half of 2008 were $9.4 billion, eclipsing the sum gained in all of 2007 ($9.2 billion).
In fact, Charles Schwab says it saw a 200-percent increase in incoming calls from advisors who want to learn more about independence during September.?“Given the sheer number of advisors who are undergoing, or are about to undergo, some kind of change, it's certainly reasonable to assume that we'll see an increase in?advisors deciding?that the change they really want is to own their own practice,” says Schwab spokesperson Lindsay Tiles. “But it's still early to make specific predictions.?Also you likely won't see most of the real effects until 2009, because these transitions do not happen overnight.?Plus, many advisors right now are focused on addressing questions and concerns from their clients.”
The Road Ahead
Of course, there are still risks for Bank of America now that it is saddled with Merrill Lynch's liabilities as well as assets. For one, there are questions about whether it has enough capital to cover future liability surprises on Merrill's balance sheet — it might have to cut its dividend or take other drastic measures, says Bove, the Ladenburg analyst. After all, Lewis is, in effect, betting that the worst of the mortgage crisis is behind us and that Merrill's asset-backed securities are currently being conservatively accounted for.
It's a big bet. According to Brad Hintz, of Sanford C. Bernstein, Merrill had $8.8 billion of gross exposure to CDOs ($1.2 billion net exposure), $22.9 billion of commercial real estate net exposure and $54.1 billion of residential mortgage net exposure ($33.6 billion of it is U.S. prime mortgages) when the BofA deal was done. That comes out to about 270 percent of Merrill's tangible equity base. And that's after Merrill had already written down $46 billion in troubled securities.
Some analysts even have doubts about the wisdom behind combining investment banking and commercial banking divisions under one roof. “When it comes to fighting for capital, it will be a question of whether Merrill's investment bank will get the capital, or the commercial bank will get the capital,” says Geoffrey Bobroff, President of Bobroff Consulting in East Greenwich, R.I.
There are plenty of questions left about the U.S. financial system, how it will shake out, and how it will fare from here on out. The big positive is that the wealth management units are making money despite the turbulence in the markets. And that means management will want to keep financial advisors — especially the most productive of them — happy.
A DECADE OF DEALS
Broker/Dealer acquisitions by banks and thrifts
| Year | Number of Transactions | Aggregate Deal Value ($M) |
|---|---|---|
| 2008* | 13 | 50,913.9 |
| 2007 | 17 | 20,617.4 |
| 2006 | 20 | 4,114.0 |
| 2005 | 16 | 523.1 |
| 2004 | 15 | 696.4 |
| 2003 | 14 | 3,542.0 |
| 2002 | 18 | 175.1 |
| 2001 | 26 | 1,839.0 |
| 2000 | 38 | 39,982.0 |
| 1999 | 22 | 3,030.8 |
| 1998 | 31 | 3,504.2 |
| 1997 | 30 | 8,180.2 |
| Note: Grouped by announcement date *As of September 17, 2008 Source: SNL Financial LC |
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Creative Destruction
A selective timeline of financial history reveals that good times seed the bad times.
1887 — Lehman Brothers joins NYSE as member.
1913 — Federal Reserve established.
1914 — Merrill Lynch founded.
1920 — Prohibition; New Era bull market.
1923 — Bear Stearns founded.
1929 — Black Tuesday. Stock values lose 89 percent from peak to bottom in 1932.
1930 — The Great Depression. The Bank of the United States fails.
1933-1938 — New Deal creates the Federal Housing Authority, Fannie Mae, the FDIC and Social Security; Congress creates the SEC.
1971 — Merrill goes public.
1973-1974 — Second-worst bear market in history; stocks plunge over 50 percent.
1974 — Merrill Lynch's “bull” is introduced.
1975 — May Day; SEC creates “net capital” rule.
1977 — Community Reinvestment Act requires banks to lend to low- and moderate-income customers.
1984 — American Express acquires Lehman, merges firm with Shearson.
1987 — Black Monday. DJIA drops more than 22 percent in one day.
1989-1995 — Resolution Trust Company resolves savings and loan crisis of the 1980s; 747 banks fail, ultimately costing $160 billion.
1994 — Lehman Brothers goes public.
1994 — Sub-prime loans account for 5 percent ($35 billion) of outstanding mortgages.
1997 — First sub-prime loans securitized by First Union.
1999 — Glass-Steagall Act of 1933 repealed. Sub-prime loans represent 13 percent ($160 billion) of outstanding mortgages.
2000 — NASDAQ peaks at 5132.
2000-2001 — Fed cuts Fed Funds rate 11 consecutive times to 1.75 percent.
2003 — Lehman Brothers acquires Neuberger Berman.
2004 — SEC loosens leverage requirements for Lehman, Merrill, Bear, Goldman and Morgan Stanley.
2006 — Sub-prime loans represent 20 percent ($600 billion) of outstanding mortgages.
2007 — Lehman Brothers ranks #1 “Most Admired Securities Firm” by Fortune.
February-March, 2007 — 25 sub-prime lenders declare bankruptcy, announce massive losses or put themselves up for sale.
July 2007 — Two sub-prime-heavy Bear Stearns hedge funds collapse.
August 16, 2007 — Countrywide Financial narrowly misses bankruptcy, takes $11 billion in emergency loans from several banks.
January 11, 2008 — BofA agrees to buy Countrywide.
March 15, 2008 — Bear Stearns sold to JP Morgan Chase.
July 11, 2008 — FDIC takes over IndyMac.
September 7, 2008 — Fannie Mae and Freddie Mac nationalized, effectively doubling the national debt.
September 15, 2008 — Lehman files for bankruptcy. BofA buys Merrill.
September 16, 2008 — Fed takes over 80 percent of AIG. Barclays buys Lehman assets.
September 21, 2008 — Goldman Sachs and Morgan Stanley approved to become bank holding companies.
September 22 — Morgan Stanley says it will sell a stake to the Mitsubishi UJF Financial Group, of Japan, for up to $9 billion.
September 23-Warren Buffet invests $5 billion in Goldman Sachs.
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