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Some Merrill Brokers Say Pay Plan Urges More Customer Debt (#GotBitcoin?)

Financial advisers have complained that the pay structure pits them against their clients.

Some brokers at Merrill Lynch are pushing back against a compensation plan they claim rewards them for increasing debt their clients take on and in some cases can punish them for reducing it.

Some of the 15,000 financial advisers at Merrill have complained internally to management about a compensation structure they say urges more customer debt at a time when interest rates are rising, according to brokers and managers. Others have written over the past year to Andy Sieg, head of Merrill Lynch Wealth Management, saying the policy potentially pits them against their clients’ interests.

The skirmish is occurring as brokers digest pay policies that include what amounts to a broad pay reduction as well as changed targets for attracting new business and cross-selling certain products. Those who miss growth targets earn less than in the past; those who jump certain hurdles stand to get a bonus.

One of those targets focuses on growing clients’ net new assets and liabilities, including things like securities-backed loans and mortgages, by at least 2.5% annually.

While acknowledging some complaints from brokers, Mr. Sieg said the pay program has motivated many financial advisers and helped boost growth at Merrill. He said management considered risks for conflicts of interest and designed the plan so it doesn’t favor one product over another.

Mr. Sieg said brokers are expected to serve clients’ best interests, even if an interaction could have a negative impact on pay. “We trust our financial advisers to do the right thing,” he said, adding the firm has supervisory functions in place to monitor behavior.

This summer, about a third of Merrill brokers had pay taken back by the firm. Before 2018, there were no pay penalties connected to client liabilities.

Adding to tension within the Merrill ranks: Some brokers say they feel pressure to push Bank of America products, such as checking accounts, to wealthy investor clients. Merrill is the brokerage arm of Bank of America.

Advisers can make up lost compensation by acquiring new clients and doing more for existing clients. The catch, some brokers say, is that growing portfolios by pushing clients to take on debt can be easier than finding new assets.

Loans that are backed by a client’s investment portfolio are a particular favorite of brokerage firms, said Jeffrey Harte, brokerage analyst at Sandler O’Neill + Partners. “It’s taking money that’s already there and making more money on it, versus the much harder job of going out and growing assets,” he added.

Advisers say such loans, known at Merrill as Loan Management Accounts, can sometimes be useful. One example: a person who needs cash during an emergency and doesn’t want to suddenly sell investments to raise it. Instead, the person could borrow against the investment portfolio.

Merrill isn’t alone in pushing such loans. Brokerages have amassed roughly $200 billion in securities-backed debt over the past decade, according to wealth-management consulting firm Mink Hollow Advisors.

And while Merrill’s compensation structure has changed, these debts held by clients have actually declined.

Merrill clients in the third quarter had $37.4 billion in debt backed by their investments, the smallest amount since the start of 2015.

Still, some brokers claim the compensation program could lead them in some cases to favor a client maintaining debt if paying it down would reduce investment holdings as well as the loan balance.

Advisers keep a portion of the monthly fees the firm charges for debt products. Customers pay fees of around 1% of assets under management and up to 0.7% on securities-backed loan balances.

If a client wants to sell investments to pay down a loan, that shrinks the holdings that are the basis for the brokers’ compensation. It also counts twice against the target for net new asset and liability growth.

Some Merrill Lynch customers have complained about the lending push following the most recent changes, according to a person at the firm handling three such complaints.

Mr. Sieg said the firm closely tracks client complaints. “We have not seen any increase in complaint activity around lending products,” he said.

In 2017, Finra fined Merrill Lynch $7 million for inadequate supervision around LMAs. The firm settled without admitting or denying wrongdoing.

Merrill Makes A Play For Younger, Less Affluent Clients

Bank of America moving 300 employees who specialize in digital investing products to Merrill Lynch offices to help with younger clients.

Merrill Lynch financial advisers are about to get some help wooing younger customers.

Bank of America Corp. BAC +0.10% is putting hundreds of staffers who specialize in selling digital investing products geared toward younger, less affluent investors in its Merrill Lynch Wealth Management offices in major U.S. cities.

The 300 employees, known as “financial solutions advisers,” represent a small addition to the bank’s network of 17,500 financial advisers, but the move is a nod to the changing dynamics of the wealth-management business.

A traditional financial adviser was once the only option for upwardly mobile investors, even if most had to save for decades to qualify for their services. In recent years, robo-advisory firms and other digital investing products have siphoned off younger investors with smaller portfolios. By combining the more holistic approach of the financial advisers with the digital savvy of the FSAs, Bank of America hopes to claw back some of that business.

Merrill Lynch financial advisers offer investment advice and other services to well-off clients, usually those with more than $250,000 in investible assets. The typical adviser brings in more than $1 million in revenue annually.

Their services range from standard investment allocation to more bespoke arrangements, such as lending against art collections. In recent years, Merrill Lynch financial advisers have been encouraged to pitch clients on checking accounts, mortgages and other banking products.

The FSAs, who until now were located only in Bank of America branches and call centers, help customers set up digital investment accounts with low or no asset minimums. Customers can pick from preselected portfolios or choose investments on their own, similar to the digital offerings of Charles Schwab Corp. and TD Ameritrade Holding Corp.

The new arrangement could help traditional financial advisers avoid losing the business of existing clients’ young family members who fall below investing minimums, said Kirstin Hill, strategic-performance executive at Merrill Lynch Wealth Management. Established financial-advisory clients could opt to open a digital account to test their own stock-picking skills, she said.

FSAs are often recruited from other branch roles and tend to skew younger and more diverse than financial advisers, said Aron Levine, who oversees the digital-wealth offerings. That could create a pipeline of new talent to become financial advisers, a business that skews white and male.

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