BofA's woes making life difficult for Merrill advisers

Warren E. Buffett's $5 billion vote of confidence in Bank of America Corp. last Thursday notwithstanding, Merrill Lynch advisers have been forced to reassure clients over the past few weeks that their parent company is not headed for insolvency. Bank stocks have been battered during the recent market downturn, and none more so than Bank of America. Until Thursday, when the stock rebounded on the strength of Mr. Buffett's commitment, the bank's shares were down 28% in August and 48% year-to-date. That's a level not seen since early 2009, when the entire U.S. financial system was teetering on the edge. “It's definitely making our job more difficult,” said a veteran Merrill broker, who asked not to be identified. “Clients are calling and asking if their money is safe at the bank. I tell them Ben Bernanke said we're too big to fail.” The still uncertain size of the bank's mortgage-related liability — largely a result of the disastrous acquisition of Countrywide Financial Corp. — continues to weigh on investor confidence. The bank has announced major cost-cutting moves, including layoffs. The additional worries about commercial-real-estate loans, and exposure to European bank and sovereign debt, have stoked the rumor mill.

LOSS OF MERRILL?

For example, Henry Blodget, the former Merrill technology analyst, speculated in his blog that the bank might have to raise as much as $200 billion to meet regulatory capital requirements. Other rumors suggest that BofA may have to sell or spin off Merrill Lynch — currently the best-performing part of its business — and even that the bank is being sized up by JPMorgan Chase & Co. as a possible acquisition candidate. Selena Morris, a Merrill Lynch Wealth Management spokeswoman, had no comment on Bank of America's financial condition. “Recent news items have been as absurd as any we've seen in many years of following the company,” analyst Anthony Polini of Raymond James & Associates Inc. wrote in a report issued last week. With the stock trading at $6.30 when he wrote the report, he had a “strong buy” rating on the shares, with a target price of $16. Not surprisingly, some executive recruiters are hoping that Bank of America's woes will be their windfall if nervous Merrill advisers start considering moving elsewhere. “In the last week, Merrill Lynch advisers' interest in recruiting opportunities has spiked,” said Mindy Diamond, owner of recruiting firm Diamond Consultants LLC. “Without question, Merrill is now the biggest target for other competitors in the industry. With the advisers' concerns about the bank's stability and the cost cutting ahead for them, they have less reason to stay.” Ms. Morris said re-cruiting of Merrill advisers is nothing new. “Recruiters and competitors will always look for ways to get the attention of successful advisers,” she said. “Our advisers appreciate that ours is the best platform from which to serve clients — which is the most important consideration.” Other recruiters said it is a stretch to think that the bank's difficulties would cause advisers to head for the exits en masse. “I think there's a realization that the panic is overblown,” said Danny Sarch, head of Leitner Sarch Consultants Ltd., who has been calling his Merrill contacts. “I had a Merrill adviser tell me he thought it was naive to think that the bank doesn't have problems, but that it was also naive to think that it was going under.” Certainly, Mr. Buffett's an-nouncement Thursday that his firm, Berkshire Hathaway Corp., was going to invest $5 billion in Bank of America preferred shares was a much-needed boost for the beleaguered bank. Mark Elzweig, another recruiter, said that the Buffett investment is “a tremendous confidence-building measure,” and that headhunters anticipating some quick hits placing advisers out of Merrill Lynch had better come up with an alternate plan. “I think a lot of advisers have shrugged this crisis off. I don't think it will prompt a rash of defections,” Mr. Elzweig said. It's been busy, said Lisa Kent, senior vice president of investments at Merrill Lynch Wealth Management, who has been a Merrill adviser for 30 years.”We're so focused on dealing with clients right now that no one's had time to address any calls from recruiters that might have come in,” she said. As alarming as the news at Bank of America has been for Merrill Lynch advisers, things are not much better at the other wirehouses. Advisers at large firms such as Merrill — particularly high-end producers — usually look to other wirehouses when considering a move. And just as Bank of America has announced cost-cutting initiatives, so too have competitors such as Morgan Stanley Smith Barney LLC and UBS Financial Services Inc.. “We talked to another firm recently and we weren't impressed,” said one veteran Merrill adviser, who asked not to be identified. “Other firms are suffering from the same things we're suffering from. It would surprise me if these difficulties motivated many people to leave the firm.”

INCENTIVES THE KEY

Financial incentives, not Bank of America's problems, are likely to be the bigger factor in whether Merrill brokers consider leaving. January will be a moment of truth: Many advisers will be in the fourth year of seven-year retention packages, and as the agreements age, they become less effective at keeping brokers on board. “Every year that passes, the protection level of these packages falls,” said Andy Tasnady, a compensation consultant with Tasnady Associates LLC. With the signing bonuses being offered by wirehouse competitors such as MSSB, UBS, Wells Fargo Advisors LLC — and even RIA firms such as HighTower Advisors LLC — as large as they have ever been, advisers who jump ship can still be made whole and then some. This is also the last year for Merrill advisers to get the back-end bonuses of their retention packages. For the biggest producers, the back end is guaranteed, but for others, it depends on their production for the rest of the year, recruiters said. Whether they get the bonus or not, once it's off the table, it's one less thing keeping them at Merrill Lynch. If the financial difficulties of Bank of America get worse, it could choose not to pay as much to keep its advisers from bolting to other firms. But until there's evidence that that is the case, Merrill advisers may be content to stay in place. “My sense is that the bank will weather this storm, and it won't cut into Merrill Lynch,” one of the advisers said. “We are the cash cow. You'd like to think they understand where the profits are, but it may imply a logic that isn't there.” aosterland@investmentnews.com