Evaluating Merrill Lynch for Financial Advice


My parents recently deposited a large sum of cash into their Bank of America (BofA) account and not surprisingly BofA noticed and promptly began drooling over err I mean courting my parents.  “Oh you should meet with our advisors at Merrill Lynch!  They will treat you to some delicious food and free Starbucks coffee.”  Ok, they didn’t say that last part, but something along those lines? ? At any rate, my parents did meet with the Merrill Lynch advisors and were wooed and wowed with fancy presentations and of course free Starbucks coffee.  They called me excitedly asking me what I thought of investing with them.  So I decided to do a little “investigation” of my own into Merrill Lynch’s suitability and reputation as financial advisors.

First thing I did was do a FINRA broker check on the specific advisors that would be handling my parents money and I suggest you do the same if you’re evaluating a financial advisor and/or insurance salesperson.  I also recommend doing a cursory google search and searches on linkedin and facebook if available, because you never know what additional information you’ll find that a FINRA broker check wouldn’t reveal.  Unfortunately the Merrill Lynch advisors have very generic names kind of like John Kim so I wasn’t able to find much.  Works best if they have a unique name.

A Quick Background on Merrill Lynch: Merrill Lynch used to be its own independent company but had to be bought by Bank of America (BofA) in 2008-2009 after suffering several financial blows.  It is now considered the wealth management side of BofA, and there’s an online brokerage arm called Merrill Edge too.  According to Wikipedia, Merrill Lynch employs over 15,000 financial advisors and manages $2.2 trillion (with a T) in client assets, this including it’s brokerage arm though, so not just the wealth management side, which is what I’m more interested in.  Still sounds like they are doing pretty well and the BofA + ML merger has been beneficial to both sides.  I believe you need a minimum of $250,000 to be “wealth-managed” by Merrill.

Controversies: So also taken from Wikipedia (which I freely admit isn’t exactly the gold standard for the most reliable information available on the web, but sometimes it’s a good place to start), it appears Merrill Lynch was involved in some controversies, ranging from being sued by Orange County, California for self-serving advice to being a major player in the subprime mortgage crisis and becoming heavily involved with mortgage-backed collateralized-debt obligation (CDO), which I gathered is a controversial type of security.  Either way, what I pieced together from quickly scanning this information and from this Atlantic article here and NBCnews article here, is that ML isn’t exactly the moral pinnacle of financial institutions, but let’s be real, ML isn’t unique in that way, they are just like many other big financial corporations with huge conflicts of interest.  But I also gathered that because of their own questionable practices, they ended up hitting the financial skids and having to be bailed out by BofA.  So far not sounding too much like the company I would want my parents to invest a large portion of their nest egg with even though I’ll admit that ML is no better or no worse than many of the other financial institutions out there.

I also searched the web, mostly reading bits of forums from bogleheads to reddit to see what some other people might have experienced in their dealings with ML advisors and it was more negative than good, so that already put another check in the con side for me.

Fees.  But ultimately, it comes down to fees for us.  The ML advisor my parents met with stated they charge a whopping 1.5% of assets under management (AUM) and keep in mind this does not even include all the other misc fees that will undoubtedly be tacked on.  Granted we’ve been quoted 2% of AUM, so maybe 1.5% isn’t the incredulous.  Still, the industry average is 1% so that means ML has to outperform everyone else by at least 0.5% to be on par with the finance industry and considering Vanguard only charges 0.3% of AUM they have to perform a full 1.2% better than Vanguard to be on par with them.  I really don’t see ML being able to outperform the industry or Vanguard by that much consistently, especially when you factor in transaction costs and taxes.  The other nail in the coffin was the Personal Capital study which found that ML charges the highest investor fees but I didn’t find anything about how ML advisors are able to beat the market.

In our current low return rate environment as described by the McKinsey study, every cent lost to fees or transactions costs or whatever, is ultimately a huge disservice to my parents’ retirement portfolio.  In retirement, considering my parents risk tolerance (very low) and timeline (long), I expect they’ll earn an average rate of return of about 4-5% for the next decade.  After ML takes their 1.5% cut in fees off the top, they’ll be left with 2.5 -3.5% in returns.  Then subtract inflation which generally ranges between 2-3% and taxes and other transactions fees and you can see that my parents are basically earning next to nothing.  Fees and taxes are critically important to my parents, who are very risk averse and don’t have any money in tax sheltered accounts like a Roth IRA/traditional IRA or 401(k)/403(b).

Moral Integrity?  When my mom asked the ML advisor about Vanguard he told her that Vanguard is very expensive and they charge a lot of hidden fees.  Something along those lines.  Oh My Gosh, LIES!  I can’t believe he can say that with a straight face.  I’d half believe him if he said he had the ability to outperform Vanguard’s index funds by X% and therefore he was a better choice as a portfolio  manager or if he talked about other things he could provide my parents with aside from just portfolio management such as total financial planning and tax efficiency, but to just outright lie and say Vanguard charges hidden fees and is more expensive?  He lost most of his credibility with me there.

Conclusion: I do not think ML is a good company for my parents to invest their money with nor is it a good place for most people.  FYI, I’m strictly talking about ML as financial advisors for individual investors, not about institutional investors (though I think Orange County would beg to differ) or about Merrill Edge.  Sure they have convenient locations and fancy offices and the free Starbucks coffees, but is that what you want to be paying for?  If so then maybe it’ll work for you.  Personal Capital’s study found they charge the highest fees and their overall reputation seems neutral negative at best.  Also, granted he was just one advisor, but the ML advisor lied to my parents about the fees Vanguard charges and I reckon he’s not the only one within ML to do so.  While I don’t like my parents current financial advisor much either (he’s OK), he’s still the lesser of the two evils in my eyes.  I ended up strongly advising my parents against investing any money with ML or purchasing any annuity or other insurance products from them either.

I’ll leave you with this excerpt from William Bernstein’s popular investing book The Four Pillars of Investing that I saw on White Coat Investor’s blog that aptly describes the kind of battle my parents would face if we had invested with Merrill Lynch.  The excerpt summarizes nicely the dangers of people constantly being faced with a conflict of interest day in and day out and what kind of people  that breeds and of course the dangers to the unsophisticated investors, like my parents.  I know it sounds weird but I was actually quite moved by this excerpt, in a sad kind of way.  Further tying up this post with a nice bow, he mentions Merrill Lynch by name in the excerpt.

“Make no mistake about it, you are engaged in a brutal zero-sum contest with [the financial industry]– every penny of commissions, fees, and transactional costs it extracts is irretrievably lost to you….

Brokers do undergo rigorous training, sometimes lasting months–in sales techniques.  All brokerage houses spend an enormous amount of money on teaching their trainees and registered reps what they need to know– how to approach clients, pitch ideas, and close sales.  One journalist, after spending several days at the training facilities of Merrill Lynch and Prudential-Bache, observed that most of the trainees had no financial background at all. (Or, as one used car salesman/broker trainee put it, “Investments were just another vehicle.”)….

What do brokers think about almost every minute of the day?  Selling.  Selling.  And Selling.  Because if they don’t sell, they’re on the next train home to Peoria.  The focus on sales breeds a curious kind of ethical anesthesia.  Like all human beings placed in morally dubious positions, brokers are capable of rationalizing the damage to their client’s portfolios in a multitude of ways.  They provide valuable advice and discipline.  They are able to beat the market.  They provide moral comfort and personal advice during difficult times in the market.  Anything but face the awful truth: that their clients would be far better off without them.  This is not to say that honest brokers who can understand and manage the conflicts of interest inherent in the job do not exist.  But in my experience, they are few and far between….

Brokers will protest that in order to keep their clients for the long haul, they must do right by them.  This is much less than half true.  It’s a sad fact that in one year a broker can make more money exploiting a client than in ten years of treating him honestly….

Your broker is often your neighbor, fellow Rotarian, or even family.  And eventually, by design, they all become your friend.  Severing that professional relationship, although necessary to your financial survival, can be an extremely painful process.”

Anyone have a different opinion of or experience with ML?  Any really good stories from someone NOT affiliated with ML in any way to redeem them as financial advisors?  I’m open to hearing them!  Share with us in the comments below!

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