On Advice

Cross-selling can be lucrative — and dangerous — for big brokerages

Merrill embraces it, while Wells Fargo has moved away from the practice

Feb 21, 2019 @ 11:49 am

By Bruce Kelly

Merrill Lynch and Wells Fargo Advisors currently stand at opposite ends of the spectrum when it comes to advisers selling or recommending banking products to clients.

Owned by Bank of America Corp., Merrill Lynch is embracing the practice and — since the start of last year — compensates its nearly 15,000 advisers for reeling in new households and getting existing clients to sign up for banking services like loans and deposit accounts. The company believes that clients are happier and feel more secure if their financial life, from banking to wealth management, is in one place.

Known in the industry as cross-selling, the practice involves financial institutions getting clients to buy multiple products and services. By all accounts it is lucrative for the banks. Another clear positive for the financial institution is that a bank product, a mortgage, for example, tethers the adviser's client to the bank.

Merrill Lynch makes no apologies for the push in banking.

"We give clients better advice when we see the entirety across the balance sheet," said a senior Merrill Lynch executive who asked not to be identified. "And clients get benefits, like discounted lending rates and credit card offers. This is what clients are telling us they want. The opportunity is real, and we were not delivering that."

Wells Fargo Advisors, part of Wells Fargo & Co., is currently taking a different position. Still stinging from a series of scandals at the parent bank in which it was revealed bankers were paid after opening phantom accounts, Wells Fargo Advisors has ditched incentives for their 14,000 advisers to sell banking products.

"The firm used to have deferred compensation goals for lending but moved away from that, post the scandals," said one Wells Fargo rep, who asked not to be named. "It took away all incentives for lending, above standard comp. Otherwise, Elizabeth Warren would make it her rallying cry for the 2020 election."

A source at Wells Fargo Advisors confirmed the change, saying that the firm evaluates compensation and incentives regularly and decided to focus on advice and client outcomes.

The question facing Merrill Lynch, and other brokerage firms involved in cross-selling, is when does the practice become abusive?

The Merrill Lynch executive was quick to note that it has guardrails in place to avoid abusive sales practices and that its focus is on providing the best service and appropriate product to the client.

Firms pushing cross-selling run the risk of alienating advisers, some of whom abhor the practice because they feel it gets in the middle of their relationship with clients.

They can also draw the eye of securities regulators.

In 2016, Massachusetts' Secretary of the Commonwealth William Galvin charged Morgan Stanley with conducting an unethical, high-pressure, sales contest among its financial advisers to encourage clients to borrow money against their brokerage accounts.

From January 2014 until April 2015, the firm ran two different contests involving 30 advisers in Massachusetts and Rhode Island. The goal was to persuade customers to take out securities-based loans in which they borrowed against the value of the securities in their portfolios with the securities serving as collateral.

Advisers could earn $1,000 for 10 loans, $3,000 for 20 loans and $5,000 for 30 loans. The contest, which was closely monitored by Morgan Stanley management, generated $24 million in new loans, Massachusetts alleged.

Morgan Stanley later agreed to pay Massachusetts $1 million to settle the matter.

Many in the wealth management industry believe that such examples of cross-selling ultimately may undermine or erode the relationship between the adviser and the client.

Of course, Wall Street wirehouses for decades have offered banking products like jumbo mortgages and cash management accounts for clients. Banking is a fundamental service and firms that don't offer it may lose out.

"Regional B-Ds that don't have a banking option are at a disadvantage," said John Pierce, head of recruiting at Stifel Financial Corp, which has owned a bank since 2007. "The difference is, we own the bank. The bank doesn't own us. There is no compensation incentive for advisers to [promote] any banking products or cross-sell."

Mr. Pierce says that he is currently recruiting advisers from Merrill Lynch and Wells Fargo Advisors. "I definitely think banks view [cross-selling] as a protective strategy," he added.

There have been no reports that Merrill Lynch's emphasis on compensating advisers for cross-selling has resulted in shoddy treatment of clients. However, recent examples show the dangers of the practice. Will Merrill Lynch keep its guardrails against sales practice abuses in place, or will they fall by the wayside when the firm needs to boost its bottom line and advisers want a bump in pay?


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