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Will Merrill Lynch’s new online brokerage offering make a difference?

Posted on July 29, 2010 at 10:43 am

There’s been a lot of speculation about what or what not Merrill Lynch (now owned by Bank of United States of America) intends to do with its re-launch of Edge, Merrill’s online brokerage offering.  Here’s a quick summary of what was punted around post-announcement:

  • MorganStanley: We do not view Bank of America/Merrill Lynch’s new online brokerage product, Merrill Edge, as a serious competitor near to medium-term to Schwab and TD Ameritrade. Bank of America and Wells Fargo/Wachovia have had online brokerage products for some time and they haven’t impacted TD Ameritrade and Schwab’s ability to grow assets – clients choose to use one product over another and don’t easily switch. — Analyst, Celeste Mellet-Brown
  • FBR Capital Markets: Bank of America will need to invest hundreds of millions in technology, customer support, and branding to truly compete for new customer assets. — Analyst, Matt Snowling
  • Raymond James: It’s “highly unlikely” that Merrill Edge will cause a significant number of existing clients to leave Schwab, TD Ameritrade or E*Trade. We believe this is simply a re-branding of Bank of America’s existing online brokerage .– Analyst, Patrick O’Shaughnessy
  • RIABiz: Such access could take the form of a team of advisors who handle inquiries up to some form of a hand-off plan where customers being handled by call centers could get referred to a full-service broker as their assets grow and their needs for advice become more sophisticated. In this hand-off endeavor, Merrill Lynch could have – in one respect – an edge over Fidelity, TD and Schwab, which have been successfully handing off billion of dollars of assets from their branches to RIAs for several years.
  • Registered Rep: The idea is to convince current clients to give them the “play” money they have parked at the discounters, which can amount to substantial sums, and to capture the hearts and minds of young people who have yet to amass their wealth. We’re talking serious dollars here. At stake is a coming intergenerational transfer of wealth—the evolving wealth of today’s 87 million-strong, 20-something “millennial” population, born between 1979 and 1999. This wealth is projected to grow from $172 billion today to a staggering $13.4 trillion in investable assets (liabilities reaching a shocking $16.2 trillion) by 2030, according to internal Merrill research.

My Take

All of the reasons that Merrill Edge shouldn’t work (technology and service investments, channel conflict with Merrill’s financial advisors, incumbent leadership) are valid. Merrill’s 15,000 member strong advisory unit is/was a driving force for the firm and many of them view this launch as a threat to their core businesses.

But here’s the thing: I’ve written repeatedly that wealthy and soon-to-be-wealthy investors employ a combination of full-service and do-it-yourself investment tools.  In fact, many of the brokerages are courting these types of investors with automated, professional-grade services, like E*Trade’s Online Advisor.  As the future unfurls, these types of investors will continue to use tools and services that satiate the comfort of control and the need for professional advice.  Merrill Edge plays right into this.

This isn’t about getting a $25k minimum account and praying the account holder brings more.  It’s a foothold, but it’s also a way to hold onto wealthy clients with a lot more money under management as they oscillate moving their funds in into and out of semi self-directed tools and professional money managers.  Edge gives that money one home.

Additional Resources

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  • Insider buying trends (SINLetter.com)

    Posted on August 1, 2010 at 11:29 am UTC

    Asif Suria has done great work over the past couple of years.  Check out what he does at SINLetter.com.

    He publishes an Insider Weekend which runs down insider buying/selling trends (a Tradestreaming hallmark) and highlights specific names that are seeing significant insider activity.  Here’s the current installment.

    Insider buying rebounded last week with insiders purchasing $13.42 million of their stock last week when compared to just $3.4 million in the week prior. Selling picked up pace with insiders selling $498.22 million worth of stock.

    Suria compares buy/sell ratios to previous weeks’ activity:

    The Sell/Buy ratio this week compares favorably with the week prior when the ratio stood at 98.64 (51.13 without the AutoZone sales).

    On the notable buy/sell side, Suria calls out activity in Blackrock (BLK) and Eagle Bancorp (EGBN) among others.  Check it out.

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  • How to make Betterment better (Hint: truth in marketing)

    Posted on July 30, 2010 at 11:58 am UTC

    Sometimes, it’s worth reading the fine print — especially, when it comes to financial products.

    I was interviewed by Mint.com recently about my thoughts on Betterment, a startup that performed pretty well at recent tech conference, TechCrunch Disrupt (see, Betterment wants to be your new, higher-yield savings account).

    What is Betterment?

    Well, it’s really an investment advisory service that masquerades as being a better savings account.  By removing much of the jargon (the site doesn’t even mention securities by name), Betterment removes many of the barriers to putting money in the market.  As I said in the Mint interview:

    For most people, opening an online trading account and figuring out what to buy and who to listen to, there’s so much noise out there.

    And that’s true: how many individuals really understand asset allocation, diversification, risk when professionals have such a hard time defining them?  It’s kind of like I know it when I see it.  Betterment provides a usability layer that requires only one decision point: what percentage of my money do I want in the market?  That’s it.

    Removing the confusing jargon and the pain points associated with complicated concepts is ultimately a good thing.  I can just picture my grandparents trying to navigate an E*Trade account trading screen.

    Oops, it’s not actually a bank account

    While pursuing a noble end (making investing easier for the mass majority), Betterment stumbles when it positions itself as an alternative to a savings account.  It is most definitely NOT a savings account.  Money in Betterment is split between Exchange Traded Funds (ETFs), one of which will include U.S. Treasury Bonds if you allocated to that.  That means, an account holder

    • risks losing some, if not all, his money
    • will see fluctuations in the account
    • will have investment-level taxes on gains

    I was quoted in the interview:

    “They took a process that’s inherently scary and overwhelming for people and used technology to simplify it,” says Miller. “I think that’s an honorable thing. But to market it again and again, to talk about a savings account, is just disreputable. It’s scary, actually.”

    Though it appears that they’ve toned it down recently, there’s still just too much talk/discussion on the Betterment website about safety and savings.  Betterment may be a great product to *invest* spare cash just sitting in a savings account (much like ShareBuilder used to be).

    Just don’t compare it to the savings account.  At 90 basis points (.9%), it’s also expensive.

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    Source

    A Better Savings Account? (Mint.com Blog)

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  • CNBC’s Hedge Fund Trade of the Week (video)

    Posted on July 30, 2010 at 2:26 am UTC

    A look at hedge fund trends, with Anthony Scaramucci, Skybridge Capital

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  • More research points to power in piggyback investing

    Posted on July 29, 2010 at 2:14 pm UTC

    Tradestreaming is all about finding the right investor willing to share the most valuable information.  Sometimes, sharing important information is required by law.  Like, when an investment fund or company is required to report portfolio holdings.  Piggyback investing using regulatory filings to create all-star portfolios made up of the best picks by the world’s most profitable investors.

    Warren Buffett is clearly one worthy of piggybacking and a new research paper further dissects his historical performance and lays the groundwork for investors willing to mimic Buffett’s investment moves.

    In Overconfidence, Under-Reaction, and Warren Buffett’s Investments, authors Hughes, Liu, and Zhang examine what contributes to a market underreaction to news that Buffett’s Berkshire Hathaway has made a new investment.

    Findings of market under reaction to Berkshire Hathaway’s public disclosures through quarterly filings of their holdings of publicly traded company stocks through Form 13f with the SEC for up to a year or more rationalizes Buffett’s long-term investment strategy.  We investigate over confidence as   an   explanation   for   under   reaction   indirectly   by   examining   associations between  changes   in Berkshire  Hathaway’s  holdings   and  changes   in both  financial   analysts’ recommendations   and   institutional   holdings   for   the   same   stocks…

    The link to overconfidence is based on the argument that overconfidence on the part of analyst and fund managers is likely given the highly competitive investment community in which they perform and the high rewards afforded   those   who   distinguish   themselves   as   possessing   independent   expertise.     As   a complementary  finding,   insiders  whose overconfidence   is  more   likely  to overweight   similar private information to that of Buffett tend to follow Buffett’s lead when buying by, as net sellers, selling less.

    Interesting aside, the study also finds net sales of corporate insiders of stocks held by Berkshire Hathaway tend to decrease when those holdings increase consistent with shared private information.

    Source

    Hughes, John S., Liu, Jing and Zhang, Mingshan, Overconfidence, Under-Reaction, and Warren Buffett’s Investments (July 5, 2010). Available at SSRN: http://ssrn.com/abstract=1635061

    [Hat tip: CXO Advisory Group]

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  • Wisdom on Tradestreaming (radio interview)

    Posted on July 29, 2010 at 1:44 pm UTC

    I was on the Gabe Wisdom radio show last week, part of the Business Talk Radio network.  It’s a brief overview of the book and how investors are using some of the strategies developed in the book.

    Listen below starting at 30:30 or so…

    Gabe Wisdom on Tradestreaming

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About Tradestreaming

Tradestreaming is a community of investors learning directly from experts. I’m Zack Miller, investor, entrepreneur, and founder of Tradestreaming.com and I literally wrote the book on how to invest in the age of Facebook and Twitter. Tradestreaming is the resource I’ve created to help me become a better investor.  I believe it will help you … Continue Reading