Merrill Lynch’s Makeover: BofA Will Lower Risk Profile, According to TowerGroup’s Hegarty

Bank of America's acquisition of Merrill Lynch will remake the brokerage house while giving the bank strategic technology in the wealth management and electronic trading space, according to one industry analyst.

"A lot of things are going to change for Merrill as a result of the acquisition," said Rob Hegarty, managing director of TowerGroup's Securities, Investment, Insurance Practices, at the Needham, Mass.-based research firm in an interview yesterday.

For starters, "I think their risk profile is going to get lowered, and that's going to be a very different thing for Merrill," Hegarty predicted. "In terms of providing capital, Bank of America CEO Kenneth Lewis has not made it a secret that he's not fond of the investment banking business," said Hegarty, citing remarks that Lewis made to the press last October about having "had enough fun" in the investment banking business.

Meanwhile BofA is gaining access to Merrill's retail brokerage and wealth management technology, which could turn out to be the jewel in the crown. "BofA is getting a hell of an investment in the adviser workstation. Thankfully they don't have to spend a billion dollars -- because Merrill did it for them," said Hegarty. Merrill rolled out the wealth management technology platform from Thomson Financial (now Thomson Reuters) as part of a five-year outsourcing deal in which Thomson served as general contractor and systems integrator. "That's a platform that despite some fits and starts has been a net positive for Merrill's advisers," observed Hegarty. While at first the project, mired in delays, generated some controversy (including the ouster of Merrill's CTO), now the platform could turn out to be a competitive advantage for BofA.

When it buys the firm, the bank will have more than 16,000 financial advisers from Merrill. BofA will then own the largest brokerage in the world, with more than 20,000 advisers and $2.5 trillion in client assets, according to Monday's release announcing the deal. Merrill agreed to be acquired by BofA for $50 billion in stock after the government refused to bail out the foundering Lehman Brothers and pushed it to declare bankruptcy. "Essentially, [Merrill Lynch's CEO John Thain] was forced into the deal by the events of Lehman and not by the Fed," Hegarty clarified.

On the institutional side of the business, purchasing Merrill will also push Bank of America more deeply into the electronic trading space, said Hegarty. He observed that although Merrill has not characteristically been on the leading edge, whether in electronic trading, algos (algorithms) or dark pools, it has proved itself a "fast follower." "[The acquisition] gets BofA into that space," he noted, adding, "Merrill's global presence in terms of technology is a nice pickup for BofA. " Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio