Merrill Plans No Major Comp Changes in 2020
After two straight years of upheaval in its compensation formulas, Merrill Lynch has no plans for significant changes in its 2020 grids or other pay programs, a senior executive said Wednesday.The decision reflects satisfaction with the pace of new household and new asset growth that the firm’s brokers have demonstrated since Merrill imposed a “growth grid” in 2018 that adds and subtracts grid payout points for meeting or missing pre-set targets.
“Those changes have accomplished what we hoped for and we’ve turned the growth engine back on, and right now our shifts in compensation are in the rear-view mirror,” the executive, who spoke on condition of anonymity, said.
His remarks came after Bank of America reported that its almost 14,700 brokers helped generate a seasonal record $4 billion of revenue last quarter and are on pace to add six new accounts with an average of $1.4 million this year. “There is alignment between revenue growth and advisor compensation,” the executive said.
Merrill, which lost a net 71 advisors in the second quarter, this year is not paying brokers on the first 3% of monthly revenue they generate, a constriction introdce to rein in compensation costs that executives said were outpacing revenue increases.
The balance appears to have been restored.
Merrill reported a record pretax profit margin of 26.4% on a 4% jump in revenue for the April-June period. The pretax margin for BofA’s entire global wealth and investment management division, which includes the more profitable but much smaller private bank formerly known as U.S. Trust, was 29%. Expenses in the division grew 1% from last year’s second quarter to $1.07 billion while revenue climbed 3% to $4.9 billion.
Despite the net increase of about 44,000 new household accounts generated by brokers, the $5.3 million of new money that flowed into Merrill and the private bank during the second quarter was down 49% from $10.4 billion in the second quarter of 2018, and off by about $600 million from this year’s first quarter. The global wealth division ended the quarter with $2.9 trillion of customer assets, up 5% from 12 months earlier, reflecting higher market valuations as well as new money.
The Merrill executive said some of the flow decline reflects new households tending to first open brokerage accounts before shifting to the advisory model that generates fees regardless of a customer’s penchant for trading. The firm’s Merrill One advisory platform continues to be “foundational,” producing 82% of revenue, he said.
(Wells Fargo said on Tuesday that total assets in its wealth businesses were flat in the second quarter, as net customer outflows offset higher market valuations, although its fee-based account assets rose 3%.)
Advisory accounts and net interest credited to the wealth businesses from the “sizable deposit and loan books” that brokers’ customers are opening with Bank of America have become the core economic driver of Merrill’s wealth businesses, the executive said, generating more than 82% of revenue.
Veteran Merrill brokers have complained about the push in recent years to have them refer wealthy customers to the bank for mortgages, other loans and deposit accounts. (Several years ago Merrill penalized brokers who failed to make referrals, but it has no plans to reinstate the program, the executive said.)
But BofA executives said brokers and bankers both are benefiting from the synergy. About 10% of the new Merrill accounts opened during the second quarter came from referrals from other parts of Bank of America, primarily from branch bankers and from the Merrill Edge self-directed platform, while Merrill brokers made 56,000 referrals to other parts of the bank, they said.
Separately, the Merrill Lynch executive said that the bank has no plans to open a new business channel for registered investment advisers or other independent models. Wells Fargo and Raymond James Financial Services, among other firms, have units aimed at helping RIAs manage and operate their independent advisory businesses, and several large Merrill producers have left in recent years to become RIAs.