Merrill To Sell Off Fund Unit — Is This The Beginning Of A Trend?


In today’s New York Times Business Section it is reported that Merrill Lynch is in talks with Legg Mason about the possibility of selling off its fund business. Merrill has always been driven by increasing the financial services it offers clients, so this is a stark change of direction. The question is, why is this change being considered?

Since the end of the stock market boom in the late 1990s, regulators have been taking investment banks, corporations and mutual funds to task concerning the financial improprieties that were going on at that time. Given the intensely vigilant legislative environment and the heightened fiduciary responsibilities assumed by mutual fund companies, Merrill might be taking the view that the mutual fund business carries greater risk than the potential returns at this point in time.  Brokers at Merrill Lynch are now facing, and will continue to face, increased restrictions in their ability to market mutual fund products. At the same time, investment banks will continue to face increased restrictions over how they compensate their brokers for selling these mutual funds.

Given the recent spate of regulatory and legal actions regarding the financial services industry, Merrill may have decided that it is better off getting rid of a potential conflict of interest than risking the wrath of legislators.  While Merrill is the most open about its musings regarding shedding its fund business, other investment banks may be in a similar process of evaluating their mutual fund businesses.

The financial supermarket model, which grew out of the repeal of the Glass-Steagall Act, has reached its zenith, and the pendulum has begun to swing back in the other direction.  This is likely to increase the separation between the sell-side and the buy-side in the years to come.

Comment by Al Thompson:

While I’m sure that industry events have a significant influence on Merrill’s desire to exit the fund business, there is another equally important reason.

Merrill takes enormous pride in its achievements and its global rankings as an investment bank. However when it comes to managing mutual funds the Merrill track record is lackluster and it is difficult to justify having the sales force recommend the Merrill funds in the face of so many other funds with better performance records.

It’s probabaly a good business decision all the way around.


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