July 10, 2013 / 3:59 PM / 6 years ago

Merrill Lynch makes big changes in managed account program

NEW YORK (Reuters) - Merrill Lynch is overhauling its $438 billion managed account business, spending more than $100 million to streamline how brokers open accounts, build portfolios and charge for their efforts.

The Merrill Lynch logo is seen on a building in New York, May 7, 2012. REUTERS/Keith Bedford

The project, which will be phased in from October through the end of 2015, aims to unify motley fee structures, performance reporting and billing methodologies associated with five different money management models introduced over two decades.

The programs range from “separately managed accounts” constructed by outside hedge fund managers for wealthy individuals to “wrap” programs in which lower-end clients pay a single fee to have advisers place their money into a group of mutual funds.

The renovation will “drastically” reduce paperwork, according to Merrill. Clients at most large brokerages now sign separate contracts for myriad accounts and receive performance reports as well as billing for each investment program. Account contracts can run from 672 to 120 pages, not counting more than 300 pages of welcome kits.

Merrill advisers today must manipulate spreadsheets on the side to get a consolidated view of clients’ portfolios and go through laborious paperwork to mix and match among the five options.

“Advisers have done a phenomenal job of keeping the sausage-making as far from the client as possible, but it’s convoluted for clients and advisers,” said Lorna Sabbia, head of the managed solutions group at the Bank of America (BAS.N) Merrill Lynch Wealth Management division.

Merrill’s new program calls for a single set of documents. Clients won’t have to open new accounts when assets shift among programs, and the firm’s almost 15,000 advisers will find it easier to create portfolios using strategies from multiple programs.


Rather than toggling among them or shoe-boxing clients into particular programs for the sake of simplicity, the brokers will be able to build customized portfolios using various managers and allocations.

Merrill also said it will have a “unified” fee structure tied to the mix of services and products clients use throughout its parent, Bank of America (BAC.N). Fees are currently tied to individual programs.

Out of about $438 billion of assets in Merrill’s managed account programs at the end of March, $139 billion were in accounts over which brokers had discretion, $184 billion in accounts where they must first get investment approval from clients, and the rest in separately managed accounts, wrap accounts and traditional brokerage accounts.

The majority of the 1.4 million clients in the managed account programs are invested in two of them, Sabbia said, in part because advisers get comfortable with particular platforms.

Simplifying the process for clients and advisers is a “big move,” said Alois Pirker, director of research at Aite Group, a wealth management consulting firm.

Morgan Stanley (MS.N), Wells Fargo Advisors (WFC.N) and other large competitors may eventually adopt the emerging Merrill managed account model because it is likely to create more diverse portfolios for clients and more profitability for the firm, Pirker said.


Merrill executives are aware, however, that big change creates big disruptions for advisers and clients, including the risk that some advisers will balk if their revenue shrinks.

One high-ranking broker in the Merrill system who focuses on a single management program estimates that his team will likely lose 10 percent of its revenue under the new single-fee, relationship-pricing structure - unless he decides to reduce the discounts he typically offers clients.

“We have advisers who built practices and specialties on the systems we have given them,” Sabbia said. “They will have a lot more flexibility, but this is a big change for us and they have to get acclimated to that.”

But even the minority of advisers who suffer immediate revenue hits should benefit if the revised program proves as client-friendly as planned since they will add assets and make referrals, she said.

To ease the process, advisers will not have to move existing clients to the new platform until the last day of 2015. Advisers have received fee calculators and scenario planners to help them model the changes for themselves and clients.

New clients will be incorporated into the program beginning next year. A pilot program to “work out the kinks” will be tested across Merrill’s 11 regions beginning in the fall, according to Sabbia.

The renovation should give Bank of America a temporary advantage over rivals in the push to cross-sell banking products through their brokers, Pirker said, since the relationship pricing model is tied to the broad range of bank products and services that clients use.

There are wrinkles, however.

Two of the biggest bank products, mortgages and credit cards, are excluded from the pricing formula because of federal “anti-tying” regulations prohibit banks from extending credit on condition that a borrower obtain other services from the bank.

“We need to figure that out,” Sabbia said.

The platform renovation is not aimed at promoting one managed account style over another, she added.

However, it could accelerate the growth of accounts in which brokers have complete investment discretion - the fastest-growing trend in the managed account community - because of the ease with which advisers will be able to add separately managed accounts, exchange-trade funds and other programs to a client’s portfolio. Brokers generally receive a percentage of a client’s assets under management.

“Advisers morph to the ‘rep as portfolio manager’ platform in order to build scale, but many also enjoy leveraging third-party partners,” Sabbia said. “Now they can do it.”

Editing by Linda Stern, Lauren Young and Bernadette Baum

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