Life after the merger at Merrill Lynch

Last year’s merger of Merrill Lynch Investment Managers (MLIM) and BlackRock could have been a major headache for Merrill Lynch Portfolio Managers. This was a specialist, discretionary management unit for private clients, which was part of the institutionally-oriented MLIM. However, since last year’s merger, the portfolio management division has since been integrated into Merrill’s huge private banking franchise, which runs $1,500bn (e1,200bn). This means its staff have not gone over to BlackRock with their MLIM colleagues, and have remained within the Merrill empire. Until now, Merrill Lynch has prided itself on being able to provide a complete range of technology solutions with minimal recourse to outside agencies. But now that MLIM, the fund management arm, has moved over to BlackRock, taking with it some of the key technological platforms, Andrew Powell, previously head of international banking technology at Merrill Lynch Portfolio Managers, certainly has his work cut out. In his new role, Mr Powell is now responsible for buying the back office and technology systems for the discretionary management capacity of the private banking arm, Merrill Lynch Global Private Clients. A key part of his role will be to untangle the complex relationship with BlackRock, so that his private bank can eventually operate on a standalone basis, treating BlackRock just like any other funds provider. Moreover, he is expected to help expand the private client portfolio management business across much of continental Europe. He says that until recently, the group’s private client businesses made some use of the MLIM technology, and that group thinking has not changed since the merger. The aim remains to buck the outsourcing trend by providing custom-built in-house technology solutions, which will be completed within the next two years. “What it all comes down to is being able to leverage our internal capabilities when dealing with private client offerings, and in particular a sophisticated client base,” says Mr Powell. He believes that control is a key factor in the private client business, and that therein lies one of the main attractions of keeping in-house service functions that are commonly outsourced. “From a technological viewpoint, outsourcing still means relationship managing the vendor and making sure that the service is being delivered,” he says. “We also need to be able to see the overall architecture clearly, and that is much easier to do in-house. Sometimes in the past we have found that vendors can’t actually deliver what we have needed, and that has also influenced our decision.” So what will the next two years hold while the firm develops its own systems? Mr Powell explains that as far as the discretionary business is concerned, BlackRock has now become a third-party manufacturer, and will do the financial modeling for Merrill, but that the tools to carry out private client business will be retained by or created internally within Merrill Lynch. Mr Powell says the intention is to create an in-house fund range to act as an ‘augmenter’ to those products provided by BlackRock. Accordingly, a chief investment officer is to be appointed. “Our plan is an aggressive one. By September 2007 we intend to be onto our own platforms and to have created new and leveraged systems and technological infrastructures where necessary. We have already done our GAP analysis and are now knee-deep in our build process,” he says, referring to the studies which have been completed to ascertain the gap between capabilities and requirements. He adds that being able to, as well as being seen to be able to, pull together quality products with the technology to back them is key to business success. “When building a new product we need to develop technological solutions quickly and with minimum impact on the client. That often means using existing systems on offer elsewhere in the firm,” confirms Mr Powell. “Doing a new build completely from scratch is becoming something of a rarity.” Investor suitability Execution is a case in point. In this instance, the private bank would typically go to its institutional desk on the corporate side of the investment banking business to execute its orders. It’s a sort of ‘outsourcing internally’, according to Mr Powell. He cites two areas that have been particularly affected by the re-organisation. The first is compliance, in that the firm now needs to create its own means to evaluate and monitor activity. “We are in the process of developing our own entity capable of looking at all the relevant structures within the discretionary environment. We also have our own compliance department,” says Mr Powell. He adds that until the new build is complete, there will still be a certain amount of reliance on the capacity at BlackRock. But pre-trade compliance, relating to the suitability of the investor and the compliance requirements of Merrill Lynch itself when, for example, avoiding banking deals with institutions on a banned list, is one example of capability that the firm needs to have. Disclosure reporting is another area to look at. Legislation requires the firm to have absolute transparency when it comes to its holdings. “The authorities expect us to manage suitability as a compliance function and that is related to investor profiles, suitability and risk. We need to be able to look at trading sizes and risks that we have taken on and the size of individual investments that individuals have,” says Mr Powell. Operational procedures are the second area targeted for swift action. Here the issue is mostly around execution capability, which needs to be looked at on a case-by-case basis. But generally, this has all been brought in-house, especially seeing as BlackRock’s private client activities are limited to the US. Fixed income and forex trading are specific examples, where new systems are needed for the much smaller trading volumes demanded by private clients. “Again, we have tweaked the institutional platform to meet our own needs and have also appointed our own broker,” says Mr Powell, adding that BlackRock is now moving to its own new platform on this front. Despite all this change, the re-organisation and split away from an industrialised, fund manufacturing business has been largely well received by clients. Mr Powell says reactions to the changes have been positive and that not a single client has been lost. “Obviously we needed to get consent to transfer assets over to the new entity but this went smoothly and we had 98 per cent of it wrapped up within four months,” he says. Indeed, for clients, little will change on the surface. Mr Powell is determined to make any changes to the workings of the business as seamless as possible. “We will continue to offer a holistic advisory service plus loans and trust services all wrapped into the private client relationship. Obviously it’s not all about transaction processing. For example, with structured products, we need to have a control framework to determine that we are getting the pricing and movements right as well as access to other institutional data to compare against.” He comments that even sophisticated clients can become swamped by large amounts of data and information. “We need to carefully consider how to tailor the information which they have access to so that it will be of most use to them,” he says. Internal structure To this end, the client relationship management offering is being reworked to offer clients the use of a single IT system as far as possible, rather than several systems split in accordance with the firm’s internal structure. Internal breadth and depth will prove key to this process, but some areas undoubtedly need some external help. Mr Powell says that being able to access this when needed is a sign of strength, even for a firm committed to doing as much as possible in-house. “Clearly being a global firm means that we can use all the various experience and systems quickly, but we are also able to use a risk-based analysis on a case-by-case basis to show us when we need to access external help. That’s what helps us to maintain our high standards,” he says. He cites complex products as such an instance, saying that the private bank acts as the distributor and so needs these links to ensure accuracy when it comes to pricing or amalgamating various instruments. One area currently being brought in-house is custody and settlement for plain vanilla funds. Consequently the firm’s relationship with one such third party provider, the Bank of New York (BoNY), will end by the end of 2008. Currently the BoNY provides custody, banking and cash management infrastructures and fund management software with a dedicated team that will now transfer to Merrill Lynch.

Powell: untangling the relationship