In the year after it acquired Merrill Lynch, Bank of America Corp. got busy making sure referrals from its bankers helped drive wealth management profits.
Now thanks to a major technology upgrade, its wealth management advisers have another powerful cross-selling tool at their disposal: the ability to view BofA customers' savings and checking accounts along with their investments.
Industry experts say this rare capability is a significant advance toward the complex and elusive dream of building a true one-stop shop. It allows a more holistic view of customers necessary to better assess their needs.
Ultimately BofA also intends to better customize fees, which would be an advantage over its largest U.S. competitors.
Lyle LaMothe, the head of U.S. wealth management at BofA, says the company will be able to offer customers pricing based on their entire relationship-both assets and liabilities-and even share revenue among different units, once the brokerage and banking platforms are integrated sufficiently. "We're headed on the path to relationship-based pricing," LaMothe says. "It's something clients as well as advisors have expressed great interest in, and we're working through various iterations."
LaMothe is a Merrill veteran who headed its wealth management before the merger. Sallie Krawcheck, BofA's global wealth management chief, tapped LaMothe in September to continue in his role. His unit comprises Merrill's 17,000 brokers and BofA's 1,500 reps, who are scheduled to join the Merrill brokerage platform starting in August.
The integration of the two companies and their banking and brokerage platforms is both technological, to share customer data more efficiently, and cultural, to get employees to work as a team. BofA sponsored 19 "road shows" across the country last year to introduce commercial bankers to advisers and have them learn about each other's businesses. It also structured more robust referral programs between the bank and brokerage units.
Already these programs are boosting the bottom line. LaMothe cites the wealth management unit's production growth of 11 percent in the fourth quarter compared with the third quarter. (Production is the fee revenue advisors generate from selling financial products, such as managed accounts or mutual funds. These fees are often recurring.)
Profit margins for the global wealth management business also widened, as more business flowed to advisers. That means, on average, each product they sell is now making more money, after expenses.
"The clearest proof that everything is up and operating efficiently is that our margins were in excess of 20 percent for the quarter," LaMothe says. "I believe there isn't a competitor with similar margins."
Matthew Bienfang, a senior research director in brokerage and wealth management at TowerGroup in Needham, Mass., says profit margins in the brokerage business typically range from the mid- to high-teens.
Referral programs similar to BofA's have been put in place by other companies, but often in piecemeal fashion, Bienfang says. Establishing them formally at such a large institution represents a step forward for integrating often-adversarial banking and brokerage units. It also underscores the rapid progress BofA has made since closing the deal to buy Merrill in January 2009.
LaMothe says the company adopted several "structured mechanisms" over the past year to foster closer ties between bankers and advisers, encouraging them to exchange information and referrals.
It moved wealth managers into bank branches, so they can offer clients ready access to cash management, credit and other banking solutions. Clients also can use an online referral service to identify their own needs and the appropriate contact at the firm.
Another program refers customers in large, bank-run retirement programs, such as 401(k)s, to wealth management advisers who can offer individual retirement accounts and other products.
And BofA is piloting a program that places licensed financial advisers in 35 bank branches. The advisers help banking customers organize their finances, determine their needs and ensure they get to the proper wealth management contact to fulfill them.
Such progress has been rare among large U.S. banks. Integrating not only banking and brokerage platforms but also their disparate cultures has proved enormously challenging. Case in point: Citigroup, the pioneer of the financial one-stop shop.
A decade ago Citigroup's formation from the merger of Citibank and Travelers, an investment and insurance broker, prompted the repeal of the Glass-Steagall Act. Citigroup's ultra-wealthy private banking clients gained access to an integrated suite of banking and investment products through a single relationship manager, though everyone else still had to deal with its multiple units separately.
Now a hobbled Citigroup is quitting the effort. Last summer it sold its Smith Barney unit-the closest rival to Merrill Lynch-into a Morgan Stanley-controlled joint venture, formally distancing the bank from brokerage.
Alois Pirker, a research director at Aite Group in Boston, says some major U.S. banking firms such as Wells Fargo, which acquired Wachovia and its large brokerage unit in October, are headed in a similar direction as BofA. But their progress remains limited. (A Wells Fargo spokesperson said it was too early to comment on the integration.)
Bienfang agrees that BofA stands out. Since Feb. 1, wealth management advisers have been able to incorporate a customer's deposit information, including certificates of deposit, into the financial-planning tools of their Thomson One work stations, with the customer's permission. "That's a big deal," Bienfang says, "because it's a recognition of customers across the enterprise. It's a further expansion of holistic wealth planning." He isn't aware of any other banking company providing that functionality to advisers.
But for any company to maximize the potential of such business combinations, the critical goal is relationship-based pricing, analysts say. Coordinating discounts and other perks should help retain existing customers and draw new ones, whether through bankers or advisers.
LaMothe says perks likely will increase for clients using multiple products and services, but the details are still being mulled. "How do you create two or three products or programs that can take everything into account and end up with a fair fee," he says.
Therein is the big challenge, Bienfang says. The company ultimately doesn't know which products and services each individual values most. Yet it needs to create pricing models that are flexible enough to work for many customers with different needs.
Bienfang says the pricing should ideally depend on where the bulk of a client's relationship with BofA lies. For example, business loans tend to be more profitable than advisory services, so advisory services could possibly be offered free to a significant business-banking customer, and bank revenue shared with the brokerage unit.
LaMothe declined to elaborate on BofA's thinking in this regard, but he says it already applies elements of revenue sharing. "It's taking us down the same path as relationship-based pricing."
One foreign banking company with a significant U.S. presence, HSBC, already offers relationship-based pricing, which isn't surprising given that banking and brokerage aren't legally divided in Europe. Its Premier service requires customers to have at least $100,000 in banking and brokerage products; in return they receive discounts on those products, along with perks such as no closing costs on mortgages. Clients deal with a relationship manager, though not always the same person.
The account is especially geared toward customers seeking easy access to financial services outside their home countries. Perhaps an indication of the success BofA may find, an HSBC spokesperson says the Premier service has experienced double-digit quarterly growth since it was re-launched in 2007, and it now has 350,000 customers in the U.S. alone.