That is exactly what John Beirne, who manages $2 billion of assets, did when he left Merrill Lynch last month to start his own Registered Advisory firm. And, according to Investment News he is not the only one. In the past three months seven of the ten biggest defections from wirehouses have involved Merrill Lynch.
In my opinion, Beirne got fed-up with the sales culture of the wirehouses and was compelled to start his own firm to do what was best for his clients. He may have also left to do what was best for him.
Investors are not as enamored with big firms as they once were. Five years ago 62% of investors said they selected advisors from big firms because they felt safer. After a decade of abuse that included the stock market crashes of 2000 and 2008 investors seem to have finally gotten the message – they are not safer. Wall Street’s sales culture and greed have seriously eroded that level of trust. In fact, in a recent Investor Watchdog survey the majority of investors preferred smaller, independent, locally owned financial services firms.
Based on these survey results Beirne has made the right decision for himself and his clients.
What does it mean to investors when Merrill Lynch tells its 15,000 stockbrokers they must produce at least $250,000 of annual revenue or they will be fired?
Merrill Lynch brokers have two major choices to make. First is whether they do what is best for their clients or do they do what it takes to save their jobs at Merrill Lynch. Since most brokers don’t want to be fired they will do what it takes to preserve their jobs.
That leads to a second choice that is also ominous for investors. There are certain types of investment and insurance products that produce more revenue than other products. Many of them produce inferior results, charge excessive expenses, or both. Merrill Lynch brokers will feel increased pressure to sell these inferior products.
Most Merrill Lynch clients won’t even know they are being taken advantage of. That’s because they do not believe their trusted, friendly Merrill Lynch brokers will take advantage of them for money.
They couldn’t be more wrong.
The Financial Times reported BofA Merrill Lynch plans to hire 2,000 brokers over the next 12 months. They will hire inexperienced brokers rather than pay big upfront fees for established professionals. These brokers will market investment products to BofA’s 17 million mass-affluent customers who need wealth management services.
Alois Pirker, research director at Alte Group LLC thought this was a smart strategy, “If you don’t leverage the opportunity, you might as well split (BofA and Merrill) up again.”
I have a different take. BofA has developed a relationship with its customers delivering traditional bank services and not investment services. Now it wants to generate more revenue from these relationships – Mr. Pirker called it “leverage the opportunity.”
Leveraging relationships is good for BofA and bad for its customers when it adds 2,000 newly minted brokers to sell bank, investment, and insurance products. In my opinion, these brokers should come with the following warning label: “I am a brand new broker. I don’t know how to help you achieve your financial goals. But, I have been trained to sell you bank products.” This is not wealth management; this is product sales disguised as wealth management.
This is a common bank strategy. Build trust with traditional bank services and then use the trust to sell investment and insurance products. BofA customers beware. Make sure you ask brokers for documentation that describes their experience and other sources of investment expertise before you buy what they are selling.
Everything appeared to be going as planned for Bank of America with its settlement to the SEC until a U.S. federal judge decided to put the brakes on. Bank of America was hoping it could sweep this “minor inconvenience” under the rug for a mere $33 million. In an attempt to unveil the truth, Judge Jed Rakoff refused to approve Monday’s settlement between the U.S. Securities and Exchange Commission and Bank of America Corp. The settlement was related to the acquisition of Merrill Lynch and appears to be an attempt on the part of Bank of America executives to hide the truth about what they really knew leading up to the merger between Bank of America and Merrill Lynch.
Bank of America told investors before the merger that Merrill had agreed it would not award year-end bonuses, but it appears Bank of America had already authorized Merrill to pay up to $5.8 billion in bonuses of which Merrill ultimately paid $3.6 billion in bonuses.
Allegedly, in Bank of America company emails loss projections for Merrill increased by nearly $2 billion two days before the takeover was approved by unwitting shareholders. The bank’s executives, however, decided that the losses were not large enough to be disclosed publicly. Hey, what’s $2 billion among friends? This is just another flagrant example of Wall Street corruption.
What we know about the financial meltdown, which started in late 2007, is that Wall Street executives took insane levels of risk to maximize their companies’ short-term profitability. A series of really stupid decisions caused the demise of big names like Bear Stearns and Lehman Brothers and the sale of Merrill Lynch to Bank of America.
Part Two of this debacle occurred when Wall Street survivors were bailed out by a new president that couldn’t afford to let them fail. Now the government wants to implement new reforms so the problems don’t repeat themselves. Based on the trillions of dollars of damage that was done to the economy and investors, is it any wonder Democrats want substantial changes in the way Wall Street does business?
Its ironic, but Wall Street doesn’t want reforms that protect investors. It stands to reason it makes more money when there are fewer regulations. Consequently, Wall Street plans to fight reforms that benefit investors every step of the way. The very same investors by the way who, as taxpayers, picked up the tab for bailouts that allowed many of the most mis-managed financial services companies to survive.
Don’t under-estimate Wall Street’s commitment to self-preservation and seven, eight, and nine figure incomes. Financial services companies have spent hundreds of millions of dollars on lobbyists for decades to make sure current and future regulations benefit companies and not investors.
What hypocrisy! These are the same companies that produce warm, fuzzy advertisements that stress their trustworthiness when they ask you to buy their products and services. They employ personable advisors who tell you what you want to hear. Then they have you sign 30 page agreements that limit their responsibility and liability for what they sold you.
Wall Street gets away with its self-serving business practices because they have bought the votes of key politicians and millions of investors feel powerless in a system that is dominated by special interests.
The last thing Wall Street wants is educated investors and a level playing field.