One-Stop Banking
Mergers Are Brewing, and Customers Will Feel It -- for Better or Worse

By Nancy Trejos
Washington Post Staff Writer
Sunday, September 21, 2008

The implosion of two of the nation's leading investment banks has thrust commercial banks into the spotlight.

With their acquisition of investment banks and retail brokerages over the years, commercial banks have assumed a model more common in Europe, banking analysts and investment strategists said. That model -- known as a universal bank -- combines a retail bank, retail brokerage and investment bank under one roof.

"We are a generation of people brought up believing you went to Merrill Lynch for wealth management and you went to Bank of America for your checking and mortgages," said Matt Bienfang, senior research director at TowerGroup, an economics research firm. "People just don't think of Bank of America as being able to provide the same quality of investment advice, which simply isn't the case."

As Bank of America prepares to merge with brokerage firm Merrill Lynch, the big question is whether consumers will be helped or harmed by the consolidation of these financial institutions.

The average consumer's finances have become much more complicated -- with the advent of defined-contribution plans such as 401(k)s, the rise of credit card debt and the growing complexity of mortgages -- so financial planning has become more crucial than ever.

"We see consumers beginning to demand more services from their financial institutions than they've gotten in the past," Bienfang said.

In that sense, having basic banking services, such as deposit accounts and lending, as well as the more advisory functions of a retail brokerage, under one roof could be a good thing.

"This is sort of a culmination of the renaissance of retail," Bienfang said. "What this serves to do is move us a giant leap closer to holistic wealth management."

Other analysts bemoan what they see as the shrinking of the industry.

"The benefits for the consumer are slim or none," said Bob Ellis, senior vice president of wealth management for Celent, a Boston-based consulting firm that specializes in financial services. "It might be a little easier to move your assets between banking and brokerage firms. . . . The drawback is basically lack of choice. Products are going to be tied to each other. It's going to be hard to have a brokerage account at Merrill and do banking at Citi."

Less competition means consumers can at some point expect to pay more for products and services, Ellis said. Fees might go up. Innovation might go down, as commercial banks are not known for hiring people with entrepreneurial spirits.

David Lo, director of financial services research at J.D. Power, said commercial banks and brokerages tend to offer different products. For instance, he said, many traditional banks don't offer savings accounts with high yields, but brokerage accounts often are high-yielding. How the two entities will decide which products stay and which ones go is up in the air.

Conflicts of interest might also arise, analysts said. And the same greed that ultimately proved the downfall of investment banks -- that willingness to take risks to maximize profits -- will not vanish now that they are being folded into the more traditional, less-risky atmosphere of commercial banks. The practice that got investment banks into trouble -- packaging consumer debt into securities and selling them -- will not completely go away.

"The risk to the consumer is that they are going to be enticed to buy, invest in or otherwise utilize services that may or may not be in their best interest," said Eric Solis, chief executive of, a Web site that encourages saving. "When you walk into the door of the bank, you need to understand that the sharks are now coming to shallower waters."

The consolidation had been slow in the making but has accelerated in recent months as the subprime mortgage and ensuing credit crises toppled the giant, stand-alone investment banks. Bank of America's purchase last week of Merrill Lynch, which came as Wall Street icon Lehman Brothers filed for bankruptcy, has irrevocably torn down the wall between the banking and brokerage industries.

"You've constantly been seeing a merger between investment and commercial banks," said Roger E. Robson, managing partner of CapTrust Financial Advisors, an investment consulting firm in Tampa. "It was evolutionary. Now it's become revolutionary because of the crisis."

The Glass-Steagall Act of 1933, born out of the Great Depression, divided banking into two kinds of operations in an effort to avoid conflicts of interest and fraud. Commercial banks accepted deposits and made loans under the scrutiny of federal regulators, while investment banks, or their retail brokerages, facilitated mergers and acquisitions and advised clients and companies about their investments with very little interference from regulators.

In 1999, the provision dividing commercial banks and investment banks was repealed, opening the door for such developments as Wachovia's takeover of A.G. Edwards last year and J.P. Morgan Chase's rescue of Bear Stearns this year.

Meanwhile, in their laissez-fare world, the stand-alone investment banks moved away from their traditional role and turned to riskier practices, such as securitizing mortgages. The higher the risk, the bigger the reward -- and the more catastrophic the fall. When those loans went bad, the investment banks had no cash to survive, and commercial banks, by nature more risk-averse, stepped in to save them.

"Brokerage firms have been permitted to take a lot more risks in recent years than banks ever could," said Brian Hamburger, founder and managing director of MarketCounsel, a consulting firm for investment advisers. "Too many of those risks have not panned out and left them in a precarious position. It's really the banks that are in the sole position to rescue these firms."

Commercial banks have been better poised to handle the credit crunch because they have a steady stream of income -- deposits, which are protected by the Federal Deposit Insurance Corp.

But commercial banks are not exactly victors in this drama; they are merely survivors, banking analysts said. They too rely on leverage, or borrowed money, albeit less so than investment banks, and some of them have been struggling in these tough times.

Consumers should expect some rocky times ahead as the mergers get underway.

Customers of Merrill Lynch or any other brokerage being absorbed by a commercial bank should not be surprised if they feel the effects of two mammoth institutions combining.

For one thing, a clash of cultures could ultimately change the delivery of services, or at the very least, your broker's ability to concentrate on you. After all, it's not psychologically easy to work for an acquired company.

"You have two worlds colliding, and it takes time to integrate the back-office operations and for personnel to accept each other," said Dan Shaffer, president and chief executive of Shaffer Asset Management in Harrison, N.Y.

In light of that, don't expect your broker to stay put. Recruiters are probably already sifting through the wreckage of failed brokerages for talent. If your broker bolts and you have a particularly strong bond with him or her, you will have to decide whether to follow.

If you decide to stay, from a practical standpoint, you will have to pay close attention as the merger takes place. The programs you are in might remain, but terms and conditions could change, for instance.

"As neat as people want to try to package this stuff up, mergers are inherently mergers, and they're inherently problematic for the consumer," said Hamburger. "It's really a time for unprecedented vigilance."

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