In the days after the Oct. 19 stock market crash, Merrill Lynch & Co. faced almost as big a crisis among its own traumatized brokers as it did in trying to restore clients’ confidence in the market.
“We were dealing with a situation where a large part of the sales force was demotivated or demoralized,” says David H. Komansky, senior vice president in charge of the firm’s nationwide retail network. Many brokers had never experienced anything but the unprecedented bull market of the 1980s. For brokers, the world of easy commissions and clients eager to trade stock vanished in one day. “People came out of it shell-shocked,” Komansky said.
John Ebey, a broker in Merrill Lynch’s office in Westwood, said brokers and customers alike were over- come by “the realization that clients could lose--in fact, did lose--20% of their assets in one day.”
Now, a year later, the shock has worn off. The world remains different--daily stock exchange volume is down dramatically, and with it the commissions earned by Merrill Lynch and others on Wall Street. But the firm and its brokers are coping, sticking to a plan that they believe will ensure Merrill Lynch’s long-term prosperity.
Komansky maintains that morale among brokers is now “pretty good,” even though their incomes have fallen on average by 30% to 35%, and further staff cutbacks seem certain.
In the firm’s brand-new, marble-lined offices in the World Financial Center, with commanding views of the Hudson River and New York Harbor, Merrill Lynch’s senior executives recently outlined their two-pronged strategy for living in the post-crash world. Their survival tactics are similar to those adopted by many of the leading brokerage firms.
One tactic is to purvey optimism. An attempt is on to persuade investors that the panic is over and the financial markets are poised for a rebound. The other is to deal with present realities: If investors are still too scared to buy stocks, Merrill Lynch will sell them what they will buy. These include short-term, safe, liquid investments such as money market fund accounts, certificates of deposit or U.S. Treasury securities. By doing so, the firm hopes to maintain a growing client base, leaving it well placed to cash in once confidence in the stock market returns.
The firm is still using--but less conspicuously--the virile, frisky bull that once dominated its advertising. Even before the crash, Merrill Lynch executives feared that the charging animal was coming to symbolize the reckless excesses of Wall Street.
But while the corporate emblem now usually appears only as a small drawing next to the Merrill Lynch name, the bullishness that it was meant to represent is again the dominant theme in the firm’s new advertising campaign. One slogan is “One Year Later: Investing in a New Era.” A full-page newspaper ad, touting a planned nationwide teleconference for investors, proclaims that “On October 17th investors all across America will stop looking backward and start looking forward.”
In an interview, Daniel P. Tully, Merrill Lynch’s president and chief operating officer, brims with reasons why the future for both the firm and investors looks rosy. “Population, demographics are on our side,” he said. Baby boomers are reaching an age at which they have substantial incomes to invest. “You can’t buy enough shovels to keep the money in your back yard--you’ve got to do something with it,” Tully said. “Barring war, pestilence or the end of the world, it’s a spectacular environment.”
Net Income Down 37%
The optimism, however, seems to be based at least in part on wishful thinking. Analysts don’t see much chance of the firm or most others on Wall Street returning to pre-crash levels of profitability any time soon.
“Everybody is struggling,” said Perrin Long, an investment companies analyst at Lipper Analytical Services Corp. Merrill Lynch’s net income for the first six months of this year, $121.7 million, was down 37% from the same period in 1987. Commission revenue in the second quarter of this year was down 35% from the 1987 second quarter.
The firm has laid off about 3,000 employees since the crash, and a spokesman confirmed that plans are being made to close at least 10 of the firm’s smaller, low-producing offices around the country. Merrill Lynch’s performance is in line with the industry as a whole.
Although the firm was clearly the nation’s largest before the crash, the post-crash financial crisis at E. F. Hutton & Co. changed that. Shearson Lehman Bros. snapped up the ailing Hutton. Now, Merrill Lynch, with about 12,000 brokers, is still slightly ahead of Shearson Lehman Hutton in size of sales force. But in the first six months of this year, Shearson’s revenue for the first time was bigger than Merrill Lynch’s.
Merrill Lynch Capital Markets, the firm’s big investment banking arm, suffered from a shortage of big deals in the first half of the year, and it may lose its recently won position as the nation’s leading underwriter of new issues of domestic stocks and bonds.
Tully himself sounds less optimistic than the firm’s advertising about how quickly individual investors will return to buying stocks. “It’s going to take time,” he said, to overcome investors’ fear and reluctance to buy stocks. “You have to manage your business with the expectation that that’s going to last for years.”
As a result of a strategic decision made in the mid-1970s, the firm believes it is well placed to ride out a prolonged downturn in the stock market. Merrill Lynch made its name as the nation’s leading dealer of stock to small investors. But the abolition of fixed commissions for brokerages in 1975 led the firm to diversify and adopt a strategy known as “asset gathering.”
In addition to selling traditional products such as stocks and bonds, the firm also would meet investors’ other needs by selling cash management accounts (which Merrill Lynch pioneered), money market mutual funds, certificates of deposit, municipal bonds, insurance and other products.
Brokers henceforth would be referred to officially as “financial consultants.” By providing a wide range of innovative investment services, the firm would get clients to invest a major share of their assets with Merrill Lynch.
As a result of that, and the development of Merrill Lynch Capital Markets, the sale of stock accounts for only about 30% of the firm’s revenue, down from 70% to 80% a decade ago. Indeed, to hear top officials talk, one would think that selling stocks has become a mere sideline. “If we said our business purpose was to sell stocks, we’d really be hurting,” Tully said.
The firm won high marks in the industry immediately following the crash when it launched an emergency advertising campaign on television and in newspapers to try to end investors’ panic. In a television commercial aired during a game of the 1987 World Series, a day after the crash, William A. Schreyer, chairman and chief executive, sought to reassure the public that economic fundamentals remained strong and that the markets would continue to function. He harked back to an ad slogan from the 1970s, saying that “At Merrill Lynch, we’re still bullish on America.”
Today, Merrill Lynch is certainly bullish on CDs. Its mammoth sales force of some 12,000 brokers nationwide is now hard at work selling certificates of deposit, cash management accounts and annuities. The firm has been selling about $600 million of CDs per week, far more than any bank, even though banks and savings and loans are the traditional marketers of CDs.
John L. Steffens, head of retail operations, estimates that the firm on average is selling about $1 billion per week of savings-type instruments such as CDs and government securities.
As industry analysts point out, however, these products aren’t nearly as profitable as selling stocks. CDs, some of which are held for five years, produce less revenue for the firm. And while a broker may earn at least $200 from the purchase and eventual sale of $10,000 of stock, the sale of a $10,000 CD might net him only $20, Steffens said.
And CDs, annuities and cash management accounts just don’t stir the same enthusiasm in brokers whose hearts are really in the stock market. Komansky says the work environment for brokers today involves more drudgery and less excitement than before the crash. “It’s a hell of a lot less fun than when you could do equities, and people weren’t as risk-averse and fearful as they are today,” he said.
Some Earn More Than Before
Still, the strategy may pay off. Senior executives say total client money under investment by the firm stands at $280 billion, up from about $250 billion just before the crash. (It had fallen to about $230 billion just after the crash, a relatively small decline that executives say shows that the firm isn’t overly dependant on the stock market.) Steffens says the number of new accounts is up about 12% over a year ago.
And while most brokers have suffered a sharp drop in income, about 10% are managing to have a banner year, Steffens says. Molly Wilson, a 32-year-old broker in Merrill Lynch’s Seattle office, is among them. She says her compensation is up 15% from a year ago, attributable almost exclusively to sales of “triple-A-rated, insured type of investments” such as CDs and bonds.
The key, she says, is “we’re working a lot harder.” Since far fewer customers now call in on their own to place stock orders, she works long hours and Sundays, mailing out materials, preparing presentations for customers and using the telephone to prospect for new clients.
The firm also believes that its long-term strategy will allow it to benefit from a continuing shakeout of Wall Street firms. The number of Wall Street firms already has declined dramatically in the last decade. Jerome P. Kenney, the head of Merrill Lynch Capital Markets, predicts that over the next two years at least half of the top 10 Wall Street firms at the time of the crash will be substantially altered or merged into other firms.
Merrill Lynch also has pinned its hopes on the investment banking side of its business. Indeed, as Kenney points out, many Wall Street firms have been sustained since the crash mainly by profits from their mergers and acquisitions business.
The firm has been building up its investment banking business since 1978, when it acquired the investment banking firm White Weld. It also made a big push to beef up its research department, eventually earning a top reputation in the industry, and lured stars away from other firms in areas such as corporate finance and mergers and acquisitions.
Although as broker to the masses the firm lacked the refined image of longer-established investment banks, it has become a leading force in the field. It pioneered “bridge” financing in leveraged buyouts, in which the firm commits some of its own substantial capital on a short-term basis to back deals until permanent financing is arranged.
Earlier this year, it overtook Salomon Bros. as the nation’s leading underwriter of domestic stocks and bonds, a position that Salomon had held for years.
But lately, nearly every investment banker has begun offering bridge loans, and in the first half of this year the number of big deals handled by Merrill Lynch fell off. The firm’s overseas enterprises, especially in Europe, haven’t been doing well. But Kenney said figures for mergers and acquisitions deals should improve in this year’s second half.
For the firm’s sales force, the last year has been difficult. Not only have commissions been reduced because of the fall in trading volume, but as a cost-cutting measure the firm changed the formula for brokers’ commissions, reducing its payout to them by 6 percentage points on many transactions. Support staff has also been cut.
Still, brokers such as Wilson in Seattle and Ebey in Westwood have demonstrated that it is possible for some, at least, to do well.
Ebey, whose earnings are up 5% to 8% from 1987, said “That crash was absolutely, terribly traumatic to all of my clients and to investors nationwide,” he said. But Ebey has been able to turn misfortune into profit, pushing safe, liquid investments and staying in very close touch with his clients. “We did not want to let them think even for a minute that we had abandoned them,” he said.
He said he has also had success lately attracting some institutional business away from bank trust departments. “I see these times as marvelous opportunities,” he asserts. “We see opportunities in slow periods to increase our market penetration. We know the market will be storming again in the next couple of years, and we want to take advantage of that.”
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