Merrill Lynch’s rap sheet from the past decade reads like a chapter in a book about the history investment fraud, and the blundering herd played a central role in the global debt crisis. Yet the head of Merrill’s U.S. wealth management division and worldwide private banking and investment group posted an article in Barron’s this past weekend sounding remarkably like a consumer crusader.
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“People are increasingly looking to people they trust for advice and solutions, and they are skeptical of institutions,” John Thiel, a top executive at Merrill, wrote in a post to Barron’s
. “That is why advisors will lead the way in restoring trust and confidence in the wealth-management industry. They will do this by changing the dialogue with clients, from what it has always been to what clients want and need it to be.”
Thiel is a former financial advisor and he’s probably sincere. He’s probably a good guy trying to do the right thing. But Merrill has been the center of so many of the major frauds over the past decade that Thiel’s message can’t be taken very seriously.
Big corporations like Merrill—the world’s largest securities brokerage with some $2.2 trillion of assets under management and 15,000 advisors—take on a life of their own. These complicated corporations deliver financial advice to millions of customers amid complicated investment, ethical, and customer service considerations. Historically, Merrill’s corporate interests have collided with the consumers’ best interest and resulted in a string of bad decisions, placing Merrill at the center of one scandal after another and exposing its poor investment judgment and flawed business model, as documented by Wikipedia:
- In 2002, Merrill Lynch settled for a fine of $100 million for publishing misleading research. As part of the agreement with the New York attorney general and other state securities regulators, Merrill Lynch agreed to increase research disclosure and work to decouple research from investment banking.
- In 2002 Merrill Lynch settled for a $10 million civil penalty as a result of improper activities that took place out of the firm's Fort Lee New Jersey office. Three financial advisors, and a fourth who was involved to a lesser degree, placed 12,457 trades for a client Millennium Partners in at least 521 mutual funds and 63 mutual fund sub-accounts of at least 40 variable annuities.
- In 2004 convictions of Merrill executives marked the only instance in the Enron investigation where the government criminally charged any officials from the banks and securities firms that allegedly helped the energy giant execute its accounting fraud.
- In one year between July 2007 and July 2008, Merrill Lynch lost $19.2 billion, or $52 million daily.
- (In 2009) Merrill Lynch arranged for payment of billions in bonuses in what appeared to be ‘special timing.’ These bonuses totaling $3.6 billion were one-third of the money they received from the feds' TARP bailout.
- Bloomberg reported in September 2008 that Merrill Lynch had lost $51.8 billion on mortgage-backed securities as part of the subprime mortgage crisis.
Thiel speaks truth in this weekend’s Barron’s, writing in the weekly financial news magazine’s “Other Voices” section. In a vague reference to the regulatory reform likely to come to a head by the end of 2014 and result in a change in the standard of care now imposed on Merrill’s brokers, Thiel says financial advisors must provide “a higher standard of care.” He says advisors need to be benchmarked based on their ability to help clients achieve their financial goals instead of stock indexes.
“For too long, our industry has focused too much on the performance of the Standard & Poor's 500 index and other benchmarks, and too little on understanding what keeps our clients up at night. That requires an immediate course correction,” says Thiel. “If those of us in the business of providing financial advice can help clients understand that our purpose is to help them reach their goals for each stage of their lives—from the birth of a child to sending their children to college, from attaining adequate health-care coverage during retirement to leaving a legacy—our industry will not only begin to regain the client confidence we have lost but achieve new levels of trust.”
Thiel is echoing noble ideas expressed in professional forums for over a decade. He is embracing goals-based financial planning. Advisors should probably expect Merrill to roll out a goals-based financial planning program integrated with an investment performance application and market the heck out of it TV on major TV sports programming.
But can Merrill deliver on the lofty goals expressed by Thiel? To me, it seems like the corporate financial advisor system is a dying breed. The thundering herd has become a blundering herd because the corporate financial advice system is no longer necessary. In fact, it's a bad way of doing business for investors, as evidenced by Merrill's history of misbehavior and poor judgment.
Merrill is a relic of a time when a brokerage could underwrite, syndicate and sell investments to retail clients. They could play all the angles. In today’s world, however, ethical and regulatory complications have rendered that business model anachronistic. Technology makes markets accessible. Brokerage and custody are commoditized and an independent financial advice professional can buy research, trading, and technology for less than what Merrill charges.
Moreover, as Thiel says, people today want honest and trusting relationships with advisors, and investors are more knowledgable.
“People are increasingly looking to people they trust for advice and solutions, and they are skeptical of institutions,” says Thiel. “That is why advisors will lead the way in restoring trust and confidence in the wealth-management industry.”
Thiel is right, except Merrill is unlikely to benefit from the sweeping changes in society and financial institutions that render its business model archaic.
Independent financial advisors—fiduciaries with professional credentials who are not influenced or tied to a corporation's interests — will be the beneficiaries as clients become more knowledgeable and demanding.