From the April 2008 issue of Research Magazine • Subscribe!

April 1, 2008

Merrill Outlines Growth, Names CAO and Explains $60 Million Charge

Merrill Lynch President and COO Greg Fleming has made quite a bullish case for the company's global wealth management operations. In a presentation during the Credit Suisse 2008 Financial Services Forum, he shared the strategic advantages of the franchise, addressed it's '08 growth focus and emphasized Merrill's liquidity, enhanced capital position and "strengthened management team."

Total client assets under management for Merrill's wealth-management operations stands at $1.75 trillion, up from $1.46 trillion in 2005 and $1.62 trillion in 2006, the company says. This makes Merrill the industry leader in wealth management, Fleming says.

Some 75 percent of client assets is tied to advisor-client relationships involving $1 million and up of AUM. And average yearly sales per advisor stands at $860,000.

From 2005 to 2007, the unit's sales expanded at a 16 percent compound annual growth rate, from $10.5 billion in '05 to $14 billion in '07. Pre-tax earnings increased at a 33 percent clip during the same period from $2.1 billion to $3.6 billion.

In 2007, about 49 percent of global wealth management sales came from fees, 33 percent from transactions, originations, etc., and 18 percent from net interest. In global private client, however, 67 percent of revenues were recurring.

Merrill's global private client business and its global investment management operations account for 38 percent and 3 percent of its company-wide net sales, respectively. Investment banking stands at 14 percent, equity markets 24 percent and other operations (excluding sub-prime and collateralized debt obligations, or CDOs) 21 percent.

In 2007, the company had net write-downs of $20 billion related to CDOs and sub-prime mortgages in the second half of the year, losses of $600 million in the first half and adjustments of -$2.6 billion related to CDO hedges -- or a combined loss of $23.2 billion.

Merrill Lynch said in early March 2008 that it is discontinuing mortgage origination at its First Franklin subsidiary and is exploring the sale of Pittsburgh-based Home Loan Services, a mortgage loan servicing unit for First Franklin. The actions do not affect mortgage origination within the global wealth management group, including prime mortgages originated through Merrill Lynch Credit Corporation, and Merrill says its international mortgage businesses will not affected by these actions.

The brokerage firm estimates that total charges, primarily severance for up to 650 staff, and real estate costs related to this matter, should total $60 million in 2008. About $30 million should be recorded in the first quarter.

In early March, the company appointed Thomas J. Sanzone, 47, to the position of executive vice president and chief administrative officer. He will report to Chairman and CEO John A. Thain starting in the second half of 2008. His responsibilities include the global technology, operations and corporate services groups.

"We are very pleased to have Tom Sanzone join the senior management team of Merrill Lynch," explains Thain. "Our ability to continually leverage technology to provide clients with seamless execution and dynamic service is a major competitive advantage.

Sanzone has served as chief information officer of Credit Suisse and also the corporate and investment bank, private client group and global transaction services business of Citigroup.

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Janet Levaux is the managing editor of Research; reach her at jlevaux@researchmag.com.

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