What it means
Charles Merrill started the firm in 1914, and Edmund Lynch joined soon after, giving the business its name. Merrill built its reputation on the idea that investing should not be reserved for the wealthy.
The firm opened branches across the country and published research for retail investors. Over the decades it grew into a full-service business.
It offered stock and bond brokerage, advice on mergers, help for companies raising money, and asset management (running investment funds for clients). The company's bull logo became a symbol of Wall Street optimism, and its advisers were a familiar presence in towns far from New York.
Its business model had two sides, and the contrast between them is the key to understanding the firm. The wealth management arm earned fees for advice and a share of client assets, which produced steady income.
The investment banking and trading side earned bigger but less predictable profits, which swung with market conditions. In 2008 the firm held large positions in mortgage-related securities that lost value, and it faced severe losses.
Bank of America agreed to buy it in September 2008, and the deal completed at the start of 2009. Today the wealth management business operates within Bank of America and uses the Merrill name.
For non-finance professionals, the firm is a useful case in how a company can combine two very different businesses, and how the riskier one can threaten the safer one. It is also a reminder that advisers' fees are tied to client assets, so asset growth drives revenue.
The firm also shows how a brand outlives its owner. After the acquisition, clients kept dealing with the same advisers under a famous name, while the legal entity behind them changed.
When reading a client agreement, it is worth checking which company is actually responsible for holding your money and giving you advice.
In practice
Real-world examples.
Example
A newly promoted marketing director has received a bonus and wants to invest it. She meets a Merrill adviser who builds a diversified portfolio for her and charges an annual fee based on the size of the account. She compares that fee with the cost of a low-cost index fund before deciding.
Example
A family-owned manufacturer plans to sell the business and needs help finding buyers. The founders hire an investment bank with a firm like Merrill Lynch's history to run the process and advise on price. The bank earns a success fee on completion.
Example
A bank analyst reviewing the 2008 crisis uses Merrill's story to illustrate concentration risk. She shows how large holdings of mortgage-related securities turned a profitable trading business into a source of heavy losses, and why the firm sought a buyer. Her slides contrast the steady fees from advice with the swings in trading profit, which helps her non-finance audience see why diversified income is not the same as low risk.
Case study
Seen in the real world.
Greenfield Advisory is an illustrative, fictional wealth management firm that wants to learn from the Merrill Lynch model. It has 40 advisers and $2,000,000,000 in client assets, and it charges an annual fee of 1% of assets, producing $20,000,000 in revenue.
The founders consider adding a trading desk to boost profits. They study how large firms combined advice with trading and note that the trading side can swing from large profits to large losses within a year. The board worries that a single bad year on the desk could damage client trust built over decades.
In this illustrative case, Greenfield decides to stay focused on advice and add a small lending service for clients instead. The lesson it takes from Merrill's history is that a steady fee business is worth protecting from more volatile activities. The numbers support the choice. If markets rise 10% and client assets grow by the same amount, Greenfield's fee revenue rises from $20,000,000 to $22,000,000 without any extra risk taken on its own books. A trading desk could add profit in a good year, but a bad year could erase far more than that gain.
Watch out
Common mistakes.
- Thinking Merrill Lynch is still an independent company, when it has been part of Bank of America since the acquisition.
- Assuming that a big-name adviser costs the same as a low-cost fund, when advice fees can be materially higher.
- Believing that the 2008 troubles were unique to one firm, when many institutions with similar holdings faced losses.
Questions
People also ask.
What does Merrill Lynch do today?
Its wealth management business provides advice, brokerage and banking services to individuals and businesses as part of Bank of America.
Why did Merrill Lynch need to be sold in 2008?
Heavy losses on mortgage-related securities weakened its finances and made it hard to borrow, and a sale to a larger bank gave it a stronger base and prevented a possible collapse.
How do wealth managers like Merrill make money?
Mostly through fees based on client assets, supplemented by commissions, lending and banking income.
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