There was a time when Merrill Lynch, now the retail brokerage arm of Bank of America Corp (NYSE:BAC), was the head-turner within the investment broker arena. And to some extent, it’s still one of the most recognizable and most respected names in the business. That’s why a bunch of wealthy people have and still do take their capital to Merrill for stock- and bond-picking help.
Things are changing in that regard, though. The generation of people that “grew up” with Merrill Lynch is slowly fading away and being replaced by a generation that (1) doesn’t care about Merrill Lynch’s reputation, and (2) is amazingly comfortable with self-service on the internet.
Superficially, it’s a paradigm shift that should concern owners of BAC stock. But by borrowing a page from the playbooks of brokerage houses like Charles Schwab Corporation (NYSE:SCHW) and TD Ameritrade Holding Corp. (NASDAQ:AMTD), Bank of America may remain plenty relevant as a brokerage house for a long, long while.
What’s Merrill Edge?
Truth be told, it’s the kind of news most investors read through and then put out of mind, assuming it means little — or nothing. But, there may be something more noteworthy in the announcement than most BAC stock holders realize.
What news? The bank’s brokerage arm plans to build another 600 Merrill Edge investment centers by 2020, bringing the total up to 2,800. In the meantime, it will add another 300 advisers to the Merrill Edge army, bringing the total up to 4,000.
Merrill Edge is notably different than the Merrill Lynch of yesteryear, and for that matter, different than the Merrill Lynch of today.
Merrill Lynch brokers make a point of seeking out large accounts (households with $250,000 in investable assets) and providing high-quality personal service that make them worth the time and effort. Merrill Edge is a lower service solution for those investors with less than $250,000 in assets.
In some cases, the amount being put to work by investors is much, much less than $250,000. There’s no account minimum for Merrill Edge self-directed investors. For investors who want to plug into a prepackaged portfolio, only $5,000 is required. For personalized advice from an actual adviser, the minimum ante is only $20,000.
That’s a far cry from the so-called “whale hunt” most commission-based stockbrokers are usually on. Indeed, it’s conceivable that smaller accounts don’t generate enough annual commissions or fee revenue to make them worth their while.
Handled in the right way, though, these smaller accounts can be a bigger deal than it seems.
Method to the Madness
While most investors know, or at least know of, someone with six-figure and even seven-figure brokerage accounts, that’s not the norm.
The data change slightly from one study to the next and with the market environment. But the numbers suggest that many investors have a similar amount of money invested in the market.
For example, mutual fund giant Fidelity reckoned late last year that the average size of Americans’ retirement accounts was roughly $100,000. Other data suggest the figure, for those who’ve saved anything for retirement, is closer to $60,000. Still other numbers say the figure is somewhere in between those two numbers.
Whatever the actual figure is, the point is taken — most investors aren’t the aforementioned “whales.”
That doesn’t mean there’s no money in taking care of the small fish, though. It’s just a matter of doing so cost-effectively and focusing on collecting a large quantity of these investors even if you’re not able to give them the same quality of advice that a Merrill Lynch full-service adviser might.
To that end, a handful of the numbers Bank of America has been willing to disclose about its Merrill Edge business, which is largely conducted online, put things in perspective for current and prospective owners of BAC stock.
Chief among them is the $184.5 billion in investor assets presently held in Merrill Edge accounts. Almost as curious is the fact that the annual fee for plugging into a prepackaged Merrill Edge portfolio is 0.45% of the assets allocated to those picks, while ongoing advice from a Merrill Edge adviser costs 0.85% of the total assets being advised. Unmanaged accounts are free, and trades cost $6.95 each.
The company hasn’t yet (and probably never will) divulge how many customers Merrill Edge has, and how many are in each of its programs. But, even if the brokerage house is only pocketing an average of 0.3% of its asset base every year, that’s more than half a billion in annual revenue. Not bad for a company that boasts a bottom line of about $5 billion per quarter.
Bottom Line for BAC Stock
No, Merrill Edge’s contribution isn’t going to make or break Bank of America, leaving some BAC stock holders wondering why it’s a big deal, if it’s a big deal at all.
The reason the ongoing growth of Merrill Edge is a big deal now isn’t the revenue and earnings it’s creating. It’s the revenue and earnings it could drive later, as these smaller account owners — who tend to be younger — begin inheriting massive wealth from their parents and start amassing respectable fortunes on their own.
They’re more likely to look for self-directed web-based solutions than seek out an adviser. That means Bank of America is well positioned for a distant future — even if that future is so far down the road one can’t see it.
It’s still not the biggest opportunity the company has on its plate, but these smaller brokerage customers are nothing to dismiss either. If nothing else, once consumers are “in house,” they’re much more like to use services provided by a company’s other divisions.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
