Why Bank of America has to Re-Hire Merrill's Brokers

I just had a very interesting conversation with a Merrill Lynch type who filled me in with much more information on the subject of those retention bonuses.

The numbers: Bank of America wants Merrill's most profitable brokers. Most brokers earn about 40% of their total commissions, with the other 60% going to the firm. And if you bring in more than $1.75 million a year in total commissions, Bank of America is offering a retention bonus of 100% of your total commission. If you bring in between $1 million and $1.75 million, then you can get something very close to that in retention bonus. But if you're only bringing in say $500,000 a year in commissions, then Bank of America is less interested in keeping you, and you'll be lucky to get any retention bonus at all.

Why does Bank of America need to pay Merrill's employees to stay? It's because the clients of a good stockbroker -- and when you're bringing in a seven-figure sum in annual commissions, you're a good stockbroker -- are loyal to the individual, rather than the firm. If the broker moves, chances are that most of his clients will move with him. And right now the broker is, effectively, moving: to Bank of America -- a firm with a stingier corporate culture which might well be less assiduous when it comes to coddling high-producing divas.

What's more, the takeover by Bank of America provides a perfect one-time-only opportunity for a Merrill stockbroker to phone up his clients and tell them that Merrill's acquirer is not where they want to be, and that they'd be much better off following the broker to his new home. (Of course, he's unlikely to mention the fact that his new employer has just given him a seven-figure signing bonus.)

Stockbrokers are a bit like lawyers: they get called by headhunters the whole time. Because they get paid on a commission basis (although these days the commissions are normally a percentage of total assets rather than a commission per trade), they're profitable for whoever their employer might be, and there's constant demand for them. Many move every five to seven years, when their lock-up period ends, taking a nice signing bonus each time.

So Bank of America has essentially found itself having to re-hire all of Merrill's brokers. It doesn't care all that much about the small fry, but it is offering the bigger producers retention bonuses on a par with the signing bonuses available elsewhere. Given the hassle involved in moving from one shop to another, that's nearly always enough to persuade a broker to stay.

One open question is what is going to happen to Bank of America's private banking operation, including US Trust. Chances are it will eventually be folded into Merrill Lynch, but not for a while. A private banker, from Merrill's point of view, is essentially a glorified stockbroker, who works with richer clients and spends a bit more time talking about things like estate planning and art collections, and maybe less time talking about asset allocation and investment strategies. There might also be a bit more access to hedge funds and private-equity funds.

But for the time being, the different franchises are likely to remain separate: there's just too much chaos involved in the merger to try to make things needlessly complicated by throwing US Trust into the mix as well. When dealing with rich clients, as all these people do, it's important not to be too hasty. After all, as the entire industry knows, the rich can be very loyal -- but they can also be fickle.