Bank of America Going Easy on Merrill Lynch Advisers Makes Good Business Sense


Bank of America’s (NYSE:BAC) Merrill Lynch Wealth Management sent out a memo to its more than 17,000 financial advisors across the country on June 8. The memo effectively reduced the number of financial advisors who would see pay cuts at the end of June for not hitting financial targets set out by the bank. If you own Bank of America stock, here’s why that’s a good thing.

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Before I get into why going lenient on its financial advisors is a good thing during the novel coronavirus, let me explain what’s at stake for these advisors.

A Million in Revenue Sounds Good

Let’s say you gather enough assets for Merrill Lynch to generate $1 million in revenue from your clients. The advisor gets $420,000, while the company gets the rest. It seems like a sweet deal, but a lot of work goes into generating that million in revenue. 

Before Covid-19, a financial advisor had to do two things to maintain his or her standing within the advisor pool. They had to bring in four household credits in a calendar year and grow his or her total assets (stocks, bonds, ETFs, etc.) and liabilities (loans, etc.) by 2.5% per year.

If you didn’t meet these two goals, you would lose 2% of your pay. That works out to $20,000 on $1 million in revenue. In this instance, Merrill Lynch would get $600,000 of the revenue and the advisor would get the rest, which works out to an actual pay cut of almost 5% based on the $420,000 the advisor would normally receive. 

If you’re an advisor and I’m getting this wrong, I apologize in advance. 

Well, you can imagine how newer advisors would feel during the stay-at-home orders the country has been under. Zoom (NASDAQ:ZM) is great for having chit chats. It’s not so great for gathering assets and acquiring new clients. People need a little more leeway to get the job done. 

“I haven’t been out of the house since the beginning of March,” a Merrill Lynch financial advisor told Financial News recently. “I’m in no position and many of my colleagues aren’t in a position to hit those bogeys.”

The good ones will figure it out, but cutting their pay when the job is already tough enough, seems like a bank with its head in the sand.

Fortunately, both Bank of America and Merrill Lynch management saw the light. Financial advisors will now only have to bring in three new household credits in 2020, down from four. However, they’ll still have to grow their assets and liabilities by 2.5% during the year. If the markets keep cooperating, that shouldn’t be a problem.

What Does It Mean for Owners of Bank of America Stock

In 2019, Merrill Lynch had revenue of $16.1 billion, accounting for 17.7% of the bank’s total business. Together, with Bank of America’s Private Bank, the company’s Global Wealth & Investment Management business generated $4.25 billion in net income in 2019, 7% higher than a year earlier, and accounting for 15.5% of the bank’s overall net income of $27.4 billion, excluding preferred dividends. 

While it might not be as glamorous as the company’s investment banking business, it generated a return on average allocated capital in 2019 of 29%, 900 basis points higher than investment banking, and not too far off the 35% generated by its largest unit, Consumer Banking. 

Thanks to the $50 billion acquisition of Merrill Lynch in 2008, Bank of America was able to triple its wealth management revenue between 2006 and 2018. In 2019, Merrill Lynch was on track to add more than 70,000 household clients to the company at an average of $1.4 million in assets per household.  

In the first quarter of 2020, Merrill added more than 7,500 net new households, while referrals to and from Merrill were up 52% over last year. At the same time, it continues to grow digital usage by both Merrill and BofA Private Banking clients. By doing so, advisors have more time to bring in new business.    

Merrill Lynch remains a critical piece of Bank of America’s organic growth of its wealth management business. To kick the financial advisors while they’re down would have been shortsighted and bad business.

If you own BAC stock, reading about the changes to Merrill’s compensation in 2020 should make you breathe a sigh of relief. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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