Merrill Lynch: Bullish as ever

Merrill Lynch’s UAE managing director is confident that investor sentiment will improve and that the market will revive, but what about the small matter of e-brokerage?

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By  Massoud Derhally Published  July 1, 2001

The awakening|~||~||~|On December 28, 1998 Merrill Lynch & Co., the world’s largest brokerage house, received a wake up call. Charles Schwab & Co., the discount broker, had topped Merrill’s $25.4 billion market capitalisation at $25.5 billion.

The firm was being pounded by the rapid growth of electronic trading. The loss of market share was a salient factor in changing Merrill’s strategy towards the Internet and its embrace of online trading. The firm was forced to implement fundamental structural changes. Investors were no longer attached to a financial advisor/broker. They could now buy and sell securities at almost the same price as the brokers.

The firm, which has close to 17,000 brokers, already had Merrill Lynch Online. However, that was available only to high net worth clients. Merrill had little choice but to move aggressively. The stakes were high and it needed to reinvent itself to maintain its foothold. In December 1999, Merrill launched ML Direct in an attempt to retain and acquire new customers in the midst of the raging e-brokerage war. ML Direct was priced competitively at $29.95 a trade, like Charles Schwab, but above discount brokers like Ameritrade and E-Trade. Merrill topped the service, entering into a $1 billion joint venture with HSBC. The service was recently launched and is available to residents in Australia, Canada and England.

In the Middle East, the financial services industry is starting to catch up to that of the US. Islamic investing has entered yet another phase with the recent launch of and, which offer online trading in stocks screened according to Shariah law. CSFBdirect-eUnion, National Bank of Kuwait and DUBEX presently offer e-brokerage services.

The Jordan based Middle East North Africa Financial Network,, will soon be entering the arena as well. According to industry analysts, E-Trade has between 10-15,000 accounts in the region, Datek 8-10,000 and CSFBdirect-eUnion has around 3000 accounts.

A survey carried out by Cap Gemini Ernst & Young of Merrill Lynch Private Wealth Advisors in March 2001 estimates there are 220,000 high net-worth individuals (HNWIs) in the Middle East. HNWIs are individuals with $1 million in investable assets, excluding real estate. “The combined value of their wealth grew 18% to $1.3 trillion over the past year, despite the volatile financial markets last year. The wealth held by HNWIs in the Middle East has increased 216% since 1986, and is forecast to rise almost 54% to $2 trillion by the end of 2005,” stated the report.

The landscape is certainly changing. It warrants an in-depth glimpse into what the largest brokerage house in the world thinks of market conditions, online trading and recent developments in the financial services industry in the Middle East. Arabian talked to Brij Singh, who has been in the industry for 15 years and is currently the managing director of Merrill Lynch in the UAE.
||**||Wealth management & competition|~||~||~|
Do many of your clients invest in the technology sector and if so were they hit when the market tanked?

Brij Singh
Actually we have been fortunate most of our customers have been pretty well diversified. In fact, we have a large chunk of our customers sitting today with cash.

We were not that badly hit with the market meltdown. In fact, for many, last year was the most challenging year in the market. For us, it was the best for the business.

Do you think radical changes in equity markets are good for you, or that it means lower margins?

Brij Singh
Margins are not necessarily driven just by volatility but more so by the very competitive nature of the landscape. Also, largely by the fact there are more players in the marketplace. There is a squeeze on margins and pricing.

So, our value proposition is that we want to change the game of the industry. We want to redefine the industry, to provide value largely driven by advice and relationships.

That advisory sector segment we find is very important to ultra high net worth clients. They are much more advice receptive.

At the moment ML is a leader in the equity markets. Assets under management are approximately $1.8 trillion. Do you believe you will be able to maintain your dominance?

Brij Singh
I honestly believe that if we were having this conversation 3-4 years from now, Merrill’s assets would be closer to $ 4 trillion. A large part of it has to do with the company’s organic growth. The asset and client acquisition strategy that we have is really going to pay its dividends. In an environment where margins are squeezed you need to have more assets to be profitable.

Do you think that technology has changed finance perhaps more than any other industry outside computing itself?

Brij Singh
Yes, clearly. I think technology has been key in every way in changing the financial services industry. The access to information, the speed at which information is available and the audience it reaches now is much greater. We have more aware and knowledgeable consumers and our best clients are the most knowledgeable ones.
||**||Merrill's market outlook|~||~||~|
The S & P 500 index has declined 20% from its January 2000 peak, followed by a fall in the Dow Joes Index and the Nasdaq. According to the Economist, some “$3 trillion has been wiped off the nominal value of America’s stock markets, equivalent to a third of the country’s GDP.” Do you believe a decline in equity markets contributes to a slowing of the economy, considering the recent measures by Alan Greenspan? Do you think it would lead to declines in other markets?

Brij Singh
Clearly, when the markets wipe out such a large paper value there is a multiplier effect and it does affect the sentiment of the individual. It is pretty evident from the actions of the Fed [US Federal Reserve.]

The Fed has never done this number of cuts in this period of time ever in its history. I am very bullish and optimistic for the future.
I believe as a result of what they have done, there will be a positive impact. You will see it turn around. The Fed has cut the Fed funds rate by another 50 basis points recently. That is 250 basis points in less than five months.

On a percentage basis, that is the most rapid Fed easing on record. But we expect further easing, with the Fed funds rate down to 3.5% by late August.

There have been ten prior easing cycles where the Fed has eased as much, on a percentage basis, as it has eased this year. The Equity market was up a year later in every case, with an average gain of around 20% in the S & P 500.

How do you think a bear market will influence things? Will it encourage investors to cast around for safer havens, and put an end to the incipient equity culture; and what determines the value of an equity and a stock market?

Brij Singh
I think you can only appreciate a bull market if you have a bear market. It is a learning process for everybody.

A bear market brings you back to reality, to a rational approach. At the height of the bull market you heard CEOs say, “earnings don’t matter.” I don’t want to say who said it. But, when people make comments like that, well, you are in trouble.

When you have companies with no earnings and multiples that are out of whack, then there is a problem. I think the best part out of everything that has happened is the reality check.

Now people are talking about getting back to value. When you have people talking about getting back to value they usually have already missed the boat.

Therefore, to go through a bear market you have to have a disciplined approach. Most firms, or individual clients, have problems, because in a bear market the focus is on a buy discipline. In order to go through a bear market must have a sell discipline.

Having a sell discipline is where a seasoned professional financial advisor adds value. People really went wrong with the lack of sell discipline. One more thing is greed, and that affects logic.

Other than the financials and fundamentals, the value of equity is largely driven by a lot of sentiment. I do believe in this whole concept of consumer psychology, especially when you look at what happened last year and even the great depression.

I believe consumer sentiment drives consumer psychology and investor psychology, which eventually is what drives the market.

Merrill’s strategy has been to integrate its online offering into its offline capabilities, its people and offices. Has Merrill succeeded in unlocking the value of its analysts, bankers, traders, and brokers by translating their knowledge and experience into content that can be tapped online?

Brij Singh
To be honest, we are new kids on the block when it comes to the online business. It has been around only 18 months, and is relatively new. However, we have been ranked by the Wall Street Journal as number 2 after Schwab.

I think that is a testament to our ability, but we have a long way to go. We are still in the process of moving up the e-brokerage learning curve. I believe in a very short period of time we will move up that curve. For the markets we are in globally, I don’t think anyone can ignore the capability of Merrill Lynch to be as good of a player.
||**||E-brokerage strategy?|~||~||~|
Merrill Lynch was slow in embracing electronic trading in the United States. The loss of market cap to Charles Schwab was a fundamental factor that changed Merrill’s attitude towards the Internet. Currently electronic trading in the Middle East, while at a nascent stage, is shaping up to that of the US. You currently have and offering online trading, as well as the National Bank of Kuwait. Do you think you will lose market share by holding out on a similar offering?

Brij Singh
If you were to go back and look at what the market cap of Schwab is and where Merrill Lynch is, we have been consistent. Our market cap has not moved up and down. We are in the process of a strategic review of our businesses here. At this point, it is a bit premature [to discuss it.] However, it is true that the area we want to focus on is the ultra high net worth segment and that segment may require an e-brokerage value proposition.

There are no doubts about the benefits of this evolutionary process. The Internet, e-trading and e-commerce across the board have been positive for the financial services industry. Dubai has emerged as a centre for technology in the Middle East. There is a gradual adoption and awareness process of e-commerce and e-trade with a personal advantage for people.

The online brokerage industry is moving to the next phase of creating an online service that combines a comprehensive suite of online products with financial planning by financial advisors. Given that you do not offer electronic trading services of ML Direct or of your $1 billion joint venture with HSBC, what is your business and technology strategy vis-à-vis the Internet in the Middle East region?

Brij Singh
It would be premature for me to make a comment on this. However, we are looking at those options seriously and the different platforms. We believe if there is a segment that needs to be served, and we have the tools and can serve it, we will not ignore it.

Don’t you feel that the firm’s new Internet prowess in the US and Europe, if emulated in the Middle East, would get your financial consultants closer to their customers?

Brij Singh
Our approach is towards ultra high net worth clients. For us, it is an asset under management approach. We are not going to get thousands and thousands of customers, but rather a few that we can serve well. Without giving you any specifics, in the last three years I don’t think anyone has grown as much as we have. We pretty much have tripled our revenue base and tripled our profitability.||**||

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