David W.S. Chambers knows that he and his employer are causing more than mild consternation among bank trust executives across the country.
But seated in a 30th floor office overlooking the Hudson River, the chairman and chief executive of Merrill Lynch Trust Cos. is trying to downplay the kind of impact that his fast-growing operation will have on his bank competitors.
"Banks can sometimes be a little paranoid about Merrill Lynch," says Mr. Chambers, a somber and intense 37-year-old who has headed the unit since 1993. "They have this perception that we are going to lay waste to their business."
Mr. Chambers, whose slight brogue betrays his Northern Ireland roots, argues that Merrill is not trying to steal trust business away from banks. The nation's largest brokerage simply wants to keep its regular clients from having to walk out the door to a bank when estate planning concerns beckon.
"About 95 percent of our clients in the personal trust area are existing clients of Merrill Lynch," he says.
Consultants and even some of his competitors are inclined to believe his modest aspirations - for now.
But they also recognize that Merrill is moving aggressively. Since it started its first trust operation in 1987, Merrill has become the leader among of cadre of 25 or so brokerage-related trust companies. These firms - including PaineWebber, A.G. Edwards, and Raymond James - feel they can take advantage of their rich client bases to beat banks at their own game.
While trust activities have yet to earn a nickel in profits for Merrill Lynch, every dollar of trust assets captured by the Wall Street giant is a dollar denied to a bank trust department.
And Merrill, which currently has $27 billion in trust assets under management, is just getting ready to take off the gloves in pursuit of an ambitious corporate goal: managing $100 billion by the end of the decade.
"Given the entrepreneurial spirit of brokerage firms like Merrill, they will eventually say 'Why not go out and get all of the trust business?'" says John DeMarco, a senior vice president with PSI, a Tampa, Fla.-based research company. "At that time, the banks will really have something to worry about."
Understandably, some bankers are already starting to worry. After all, Merrill Lynch & Co. has competed with banks on every front for years.
In the 1970s, its cash management account snatched commercial and retail business from banks. And in the 1980s, Merrill Lynch took on the banks in their quintessential business by brokering retail deposits. Now, it's making inroads in private banking - making loans to and managing money for well-heeled clients - as well as trust services.
"We see the brokerages like Merrill Lynch as long-term competitors," says Sheila A. Penrose, executive vice president, trust and financial services with Chicago-based Northern Trust.
Mr. Chambers relates with a smile that "we are already a serious topic of conversation" at a few banks in Florida, where Merrill has made one of its most concerted efforts to date.
Merrill's lofty aspirations in personal trust are a reminder to banks that they have lost their traditional lock on this profitable business.
Banks can take some solace in knowing that personal trust assets under management has grown in recent years, thanks to an older and larger population with wealth amassed from post World War II prosperity.
The problem for banks, however, is that their share of the market is eroding at the expense of large national brokers like Merrill and a plethora of boutique firms often consisting of no more than a handful of lawyers and money managers, says PSI's Mr. DeMarco.
Today, brokerages - which benefit from the ability to tap into a large base of existing clients - handle 8% of all trust assets under management, according to PSI. While that share is dwarfed by bank's 42%, the brokerages are only getting started in this business.
Merrill's trust division has the added advantage of being able to tap into a base of clients who have $603 billion in assets invested with the company.
A sizable slice of Merrill's clientele, Mr. Chambers says, is near the age where planning for the administration of assets after death becomes paramount. And with the parent company striving to amass $1 trillion in managed assets by the end of the century, the potential for growth is all too apparent.
Says Mr. DeMarco: "They're a real wild card in this business."
Merrill now has teams of personal trust officers in 25 offices, covering 38 states, including New York, New Jersey, Florida, California, and Texas. This gives Merrill Lynch the greatest geographic range of any trust operation in the U.S. - banks included.
"Anybody who doesn't respect the resources that they can bring to bear is burying their head in the sand," says Curtis L. Lyman, chief executive of Raymond James Trust, St. Petersburg, Fla., a Merrill competitor.
Mr. Lyman, a former Merrill broker, said he believes his former employer's trust operation has the resources to "effectively challenge" top-tier bank trust concerns such as Northern Trust and U.S. Trust in key markets such as Florida, Southern California, and the New York metropolitan area.
"Their ability to hire top people, advertise, and create an image are resources that other broker-affiliated trust companies don't have," Mr. Lyman says.
This year alone, Merrill has opened placed teams of trust officers in Los Angeles, Chicago, and three Florida cities: Naples, Sarasota, and St. Petersburg. These trust officers get almost all their referrals from Merrill's army of 13,000 brokers. And before the year ends, Mr. Chambers says, Merrill will have trust officers in place in two Connecticut cities - New Haven and Stamford - as well as Palm Springs, Calif., and Phoenix.
But Merrill's strategy for increasing trust assets is not confined to signing up new clients. Mr. Chambers said he expects Merrill, in the spirit of Northern Trust and other large trust concerns, will begin purchasing small trust companies around the nation.
"We haven't done any acquisitions yet, but we continue to look at this option," Mr. Chambers says.
He adds that Merrill's strategy of placing trust officers in Merrill Lynch offices around the country is necessary if the company plans to compete with the hundreds of trust companies and bank trust departments.
"A lot of the success of the smaller local trust companies is being local, being right there. Clients perceive that as a huge advantage," he says.
At the same time, Mr. Chambers maintains his operation possesses advantages local competitors lack: the resources and expertise of a world- renowned brokerage. For example, a trust account with Merrill benefits from the international money management expertise of Merrill Lynch Asset Management.
"Our goal is to try to have all the benefits of being a local institution, with all the benefits of being Merrill Lynch," he says.
Currently, Merrill's trust venture is a money losing proposition on a pre-tax basis, though the company won't disclose specific numbers. Most of Merrill's trust accounts don't generate fees for the company. That's because most of the company's trust clients serve as trustee on their own accounts, naming Merrill as a corporate successor. Over time, however, as these clients get sick or die, Merrill will step in as a corporate trustee and begin generating regular income.
"This business is an investment for the future," Mr. Chambers says.
David Ross Palmer, a New York-based consultant who advises financial companies on marketing to the affluent, expects Merrill's future in this business will indeed be bright.
"Whereas in the past, the bank or trust company would have the competitive advantage of seeming conservative and safe and secure, many of the brokerage firms are now seen as safe and secure," says Mr. Palmer.
What's more, he believes, brokerages like Merrill Lynch have a stronger lock on the assets of baby boomers and individuals nearing retirement age than banks.
For one thing, Mr. Palmer says, the Merrill Lynches and PaineWebbers are more aggressive and creative marketers for their services than the typical bank.
As part of its push into the Palm Beach, Fla., area, for example, Merrill is sponsoring seminars and other events that attract the affluent, according to Jo Anne Engelhardt, senior vice president and regional trust manager with Merrill Lynch Trust's Florida operation.
The title of one recent event - "The Mind and Who is Minding Your Money," - focused on alerting senior citizens to signs of mental decline late in life.
Like many brokerage-affiliated trust executives, Mr. Chambers got his professional start in a bank trust department. And he says he feels a just a bit of sympathy for some of his smaller bank competitors.
"Merrill Lynch is just one more thing for banks to worry about in the trust business," he says. "Many banks don't have the capital bases and the power to do the kind of stuff that a Merrill can do and they are going to struggle."
