From the February 2004 issue of Investment Advisor • Subscribe!

February 1, 2004

An Invitation From Merrill

Looking for a place to custody client assets? If the match is right, Merrill Lynch's Derek Bruton has a proposition for you

For many independent financial planners and investment advisors, Merrill Lynch is the stereotypical wirehouse that exemplifies what's wrong with the financial services business. Like most stereotypes, however, this one might be outdated and not totally accurate. Merrill has certainly embraced the fee-based business model, for example. Moreover, there's at least one unit of the Wall Street behemoth whose job it is to service higher-end advisors--Merrill Lynch's Money Manager Services (MMS), which custodies some $27 billion in money manager and family office assets. The head of MMS, Derek Bruton, is a former Charles Schwab executive who chatted with editor Jamie Green late in December about MMS's services and philosophy.

Tell me about your background, and that of the Money Manager Services unit. I've been in and around the money manager/family office custody business for about 12 years. I started as a money manager with a firm in the San Francisco area, moved over to the custody side with Charles Schwab Institutional in San Francisco managing a sales region, then managed the New York sales region for Schwab. About 21&Mac218;2 years ago, I was asked to come over to Merrill Lynch and run the Money Manager Services (MMS) business. It's a four-year-old business, so we are still fairly young.

Our model is unique and effective because we partner with just about every area within Merrill Lynch--every division--to deliver a quality institutional custody service to our clients. Everything we do centers around improving the money manager's, or the family office's, P&L statements. We are very focused on lowering their costs and doing what we can to help them grow their business. I think our model will continue to be successful because of the heavy emphasis we place on high-quality customer service.

An example of how we work with other divisions at Merrill Lynch is the way we work with our global private client division. The CMA statements that the private client division uses, we use as well.

Since we're on the institutional side of Merrill Lynch, we leverage our strengths there, particularly on the trading desk and the ability to work with different trading desks across the country.

You're less interested in financial planners who mostly use mutual funds, and more interested in managers whose clients do more trading? I wouldn't exclude a manager who uses mutual funds. I think those managers and family offices that place a priority on equity trading or fixed income trading, individual issues versus packaged products or funds, that plays into our strengths more and therefore is a better match for our business.

We've also built a lot of high-touch technology and very good back-office support for our clients that enable them to lower, or at worst maintain, their expenses in their back office. Next year we want to focus even more on delivering products and services so a money manger can point to the dollars that we've either saved them, or helped them bring in.

For example, we developed some of the best reporting in the industry, as I alluded to, through the CMA account. That goes along with the tax reporting that we give to our money managers every year, which enables them to [avoid increasing] their staff to take care of year-end reporting. But nothing is more important to me in terms of institutional custody than the service that we provide to our clients. Like some of our competitors, we have a dedicated service group for our money manager/family office clients. But unlike others, we focus on the quality of that service and make sure that we walk the proverbial mile in our clients' shoes so we completely understand the urgency of their needs.

This industry has become commoditized, and often it's not whether you have a service, it's how well you execute on that service. Merrill and MMS will never be all things to all people, and that will keep us focused on the managers we're looking to work with.

Who are those managers? What is the amounts of assets under management at this point? Is that amount growing? Well, it's definitely growing. Our industry tends to measure everything in terms of assets, but I've learned that it's revenue, not assets, that management is focused on. Our typical clients have around $500 million in assets. Without precluding some of the managers that are below that, I think that size manager fits well with what we offer. That's someone looking for an institutional trading desk, for the reporting that we offer, who has assets with other broker/dealers or banks that are perhaps either overpriced or don't provide the technology and services that we do, and are looking to make a move from those custodians to us.

What do you offer that your competitors don't? What's on every advisor's mind today is best execution. It's a good thing for an advisor to have the ability to custody their assets with a custodian like Merrill Lynch, and to know that they're going to receive best execution on their trades. Merrill has been number one, according to AutEx, in terms of execution on listed securities--and within the top five on over-the-counter securities--over the last couple of years. And given that they're at a custodian that is delivering those trading capabilities, they won't have to pay a tradeaway fee like they would at a bank or some broker/dealers.

In addition, a client might be using a trust company or a bank, for example, to gain access to banking products and services--mortgages, other lending products, even retail-type products such as Visa cards, checking services, and so on. They're able to leave a bank, come over to Merrill, and get all those products and services, and see all their assets and accounts on one statement without the costs of the bank. We've seen a lot of assets go from banks to Merrill over the last two years.

I think the industry is definitely moving toward a similar focus from all the firms. Banks want to be brokers, brokers want to be banks, and we definitely have to deliver those services.

We recently ran a story written by an advisor [Ben Warwick's December 2003 cover story, "Great Expectations"] who argues that higher-net-worth folks' expectations are different: they want to know about hedge funds, they expect [a higher] level of products and service. Is that what you are finding as well? Is that part of what you offer? It's what we do offer today, through a couple of different channels. If you are offering structured products or other derivative products, [we offer] the ability for a money manager to work with the institutional trading desk and come up with a product that can offer more liquidity to a particular client with highly appreciated stock, for instance. It goes right into those institutional trading desks that I mentioned earlier. That's the place for our clients to get help for those different areas.

And not only get reactive help, but make proactive calls--looking at what clients have in their portfolios and making suggestions as to what they can do.

In terms of hedge funds and other alternative investments, that's something MMS will focus on in 2004. We have many of those products today internally; we have a prime brokerage division, for instance, within Merrill Lynch.

Structured investments and hedge funds are two areas where we can really help our clients gather more assets from their clients. We always use the term "share of wallet" internally here. We have a percentage of the client's overall business, and we want to increase that share. I think advisors are thinking the same way. If they've got $1 million that they are managing of their client's portfolio, but they know that the net worth of the client is in the $5 million range--they want to be the trusted family advisor, and they want to manage that whole piece. Maybe not manage it directly, but be able to quarterback and outsource to the best providers out there. We want to be one of those providers.

Do you keep a close watch on the expenses you charge? If we weren't thinking about it, I'm sure our clients would kindly remind us. The volume of trading that goes through Merrill on a daily basis [gives us] tremendous scale operationally, and enables us to offer market-competitive fees. I'm not going to say that they're lower than other custodians, because we're not trying to be the lowest-cost provider. We add more value than the firm that's trying to be bare-bones cheap on trading and other fees.

Some advisors might worry about Merrill being a competitor. Is that something that potential clients mention? It's interesting--this competition thing [from custodians] has been in the industry for some time now. But we've experienced very little of that from our clients. In fact, they're very enthusiastic that we're in the business with the strong name brand of Merrill Lynch.

Our clients know that we're in the business and that we have a brokerage force that's trying to increase assets and provide services to the retail client base, but we have full support from the private client side, our institutional side, that this is a business we want to be in, that we need to be in, and that we're very good at.

MMS grew out of the global clearing side of the Merrill Lynch business, so we're very good at that. We've been able to build scale to make that a very profitable business, and brought that over to Money Management Services as well.

There were already a number of accounts at Merrill Lynch related to money managers who've been working with Merrill for a long time. We came aboard and delivered the services they need to be in the business--the downloads, the management fee processing, all the basics that any custodian in this business has. And then we took it a bit further and took advantage of a lot of the other services that Merrill offers today, and that's brought us beyond being a basic custodian.

How many managers and how much in assets do you have? Across Merrill Lynch today, we have about $27 billion in assets related to money managers and family offices.

Editor Jamie Green can be reached at jgreen@ia-mag.com.

Reprints Discuss this story
This is where the comments go.