An investigation of Merrill Lynch & Co.’s call centers could hurt the firm’s opportunity with small investors, analysts say, but they think the company can avert serious harm.
The National Association of Securities Dealers is investigating whether the call centers poorly advised some small investors. Merrill directs investors with less than $100,000 of assets to its call centers. News of the investigation, which is said to have been under way for some time, was first reported in Tuesday’s Wall Street Journal.
The big New York brokerage characterized the problem as “growing pains” in the call centers that have since been overcome.
Brad Hintz, an analyst at Sanford C. Bernstein & Co., said Merrill was among the first brokerage firms to divide its customers based on how much they had in assets. The company will have to work hard to avert harm to small investors’ perception of it, he said.
Kenneth Worthington, an analyst at CIBC World Markets Corp., said Merrill Lynch probably will not lose existing customers but could lose potential new ones.
“The theory is, little acorns become big oak trees,” Mr. Worthington said. “Merrill may be losing some smaller acorns, but Merrill isn’t really focused on gathering small accounts. Their marketing and services are not geared for small accounts. Generally speaking, I’d expect smaller accounts to go to discount brokerage firms. That is where those customers get better service at cheaper prices.”
“A guy with $50,000 isn’t likely to go to Merrill anyway,” Mr. Worthington said.
But Mr. Hintz said there are reasons why smaller accounts remain valuable. “Handling small accounts better through a call center has become more critical because brokers can no longer cold call wealthy investors,” Mr. Hintz said. “Brokerage firms now rely on small accounts becoming larger accounts.”
Still, Mr. Hintz said he thinks the NASD probe will not have a “material impact” on Merrill.
“Merrill can view this as an embarrassment, but ... will handle it quickly and settle it quickly,” he said.
Mark Herr, a spokesman for Merrill, said the NASD alleges that the company placed some small clients in unsuitable investments in an attempt to increase profits. He said in a statement that the alleged incidents occurred since 2001. Since then, he said, the call centers, which are known collectively as the Financial Advisory Center, “experienced rapid growth and, in retrospect, suffered some growing pains.”
Mr. Herr said in the statement that Merrill has made changes in the past four years to improve the call centers’ operations and management. “Today the Financial Advisory Center provides outstanding service,” he said, “and a recent survey found that 86% of clients gave it a ‘highly satisfied’ rating.”
