Merrill Clients Stick to Cash Despite Rock-Bottom Rates
Merrill Lynch customers remain cautious about investing, slightly increasing their already elevated allocations to cash even as market indexes have rebounded in recent weeks and deposit rates have hit new lows.
Investors across Wall Street gravitated to cash in February and March as the coronavirus clutch on the economy emerged and stocks experienced strong volatility.
At Merrill, cash allocations rose to around 13% of client portfolio values at the end of the first quarter from 10% at the start of the year, and have edged up slightly in the current quarter, Sieg said. (Equity allocations are down to about 56% of client portfolios from 60% at the beginning of the year, meaning clients have participated in the equities rally of recent days but have “not extended themselves,” he said.)
The shift has continued despite rock-bottom rates that Merrill clients receive on cash swept from their investment accounts to deposit accounts at Bank of America. (Merrill in 2018 shifted the sweeps to its sister bank from generally higher-yielding money-market funds.) Rates on most of the linked cash management accounts are now 0.01%, with a maximum of 0.06% on a Merrill “Preferred Deposit” account.
“The interesting point here to investors is that as we have brought rates down, as the environment has changed, deposit balances have been very constant,” Sieg said at the bank investment conference. “We think it’s part of a very disciplined, responsible and symmetric way that we manage rates paid.”
It also reflects incentives that Merrill and the bank have created to cross-market their wares. (Merrill is seeking to dismiss a purported class-action lawsuit alleging that it failed to sufficiently disclose conflicts of interest in sweeping their cash to bank accounts.)
About 20% of Bank of America’s deposits originate with Merrill wealth customers, Deutsche Bank analyst Matt O’Connor said on the call.
About 45% of Merrill clients still do not have a Bank of America deposit or lending relationship, Sieg said, but he flaunted the 30,000 new Bank of America accounts that Merrill clients opened in the first quarter. Referrals of bank clients to Merrill, he added, have “continued uninterrupted” during the shelter-at-home crisis.
He also applauded Merrill’s more than 14,000 brokers for keeping most of their clients focused on long-term goals and financial plans amid the anxieties of the pandemic.
While U.S. stock indexes fell about 40% from their mid-February peaks to their March 23 lows, asset values in fee-based accounts at Merrill fell 30% to $800 billion. In the market upswing of recent weeks, the S&P 500 index has gained almost 35% and Merrill investors have benefited by about $100 billion, the executive told AdvisorHub.
“That’s $100 billion our clients would have foregone collectively had they panicked, sold and gone to cash,” Sieg wrote in an e-mail. “This shows me that our advisors were extremely effective in terms of advising against ‘panic selling’ during the March volatility.”