Mergers don’t always unite brokers

In last year’s Brokerage Report Card, we noted a clear trend toward lower ratings from brokers whose firms are digesting mergers. The observation holds true this year as well. The two firms most recently involved with mergers, Canaccord Capital Inc. and Merrill Lynch Canada Inc., rate at the bottom of our survey.

Last year, Midland Walwyn Capital Inc. – subsequently acquired by New York’s Merrill Lynch & Co. Inc. in the summer – shared a third place ranking with CIBC Wood Gundy Securities Inc., coming in just behind Edward Jones and TD Evergreen Investment Services Inc. While Edward Jones and TD Evergreen are still heading the class, Merrill is doing penance in the corner.

Several brokers tell us that since Merrill Lynch took over, the pressure to sell proprietary products has increased noticeably. And in the ‘freedom from pressure’ category, Merrill falls from an above-average 9.6 last year to an industry low of 8.1 this year. It also suffers significant drops in its scores for branch managers, the treatment of retail brokers, sales support and the quote system.

Topping it all off is payout. Merrill brokers report the second-lowest average payout, beating out only Edward Jones, whose brokers trade low payouts for other advantages. While Merrill’s brokers were generally pleased to have received a post-merger 2% bonus, one laments, ‘What’s frustrating at Merrill is you are never really sure what your payout will be.’

Midland brokers had to know what was coming. All they had to do was take a look at a similar broker survey conducted south of the border by Registered Representative magazine. In the most recent survey, published in December 1998, Merrill’s U.S. brokers gave the firm only 7.9 for freedom from pressure, and the magazine reports, ‘Merrill Lynch reps crow about the firm’s strategic position as a global powerhouse, but gripe that the firm skimps on payout, sales assistants and operations.’ Merrill’s Canadian brokers generally reflect the views of their U.S. cousins.

The word has apparently spread to other firms. Merrill is the firm that brokers at competitors mention most often as ‘the firm they’d never work for.’ A number of them cite the increasing pressure Merrill brokers feel as the primary reason to avoid the firm.

Yet despite the low scores, many Merrill brokers acknowledge that it is still early days at the firm. Asked to rate the firm’s treatment of retail brokers, one Ontario-based broker says, ‘so far, so good,’ before hedging, ‘but it’s only been a couple of months.’ In the meantime, its brokers remain somewhat unsure of the firm’s direction. Its score for strategic focus has fallen to 8.3 from 9.1 a year ago.

Such uncertainty is not uncommon in the wake of a merger. Immediately after a deal brokers are often optimistic about the outcome, but it typically takes awhile for things to shake out and, during the transition, brokers become skeptical of their firm’s direction.

A broker with Vancouver-based Goepel McDermid Securities Ltd. calls his firm’s strategic focus ‘fuzzy’ since the merger of Goepel and McDermid in 1997. And two- and-a-half years after Toronto’s RBC Dominion Securities Inc. bought Winnipeg’s Richardson Greenshields of Canada Ltd., brokers still distinguish between the ‘DS guys’ and the ‘RichGreen guys.’ One former RichGreen guy claims that the DS deal has meant backward steps for the firm’s information systems and he laments the loss of its research relationship with Donaldson, Lufkin & Jenrette Securities Corp. of New York in favour of a research deal with Paine Webber Inc.

Vancouver-based Canaccord’s situation is a little different. Its merger partners were floundering cross-town rivals C.M. Oliver & Co. Ltd. and Brink, Hudson and Lefever Ltd. And since this is the first year we’ve included Canaccord in our survey, we can’t say if its scores represent an improvement or a downgrade in the wake of its takeovers.

Also when you factor in the firm’s higher-than-average payout, its ranking improves notably. One Canaccord broker believes that the addition of C.M. Oliver and Brink, Hudson has boosted the firm’s research resources, noting that the deals are fueling Canaccord’s drive to become the biggest independent firm on the street.

We do know that the move to Canaccord has been a vast improvement for former C.M. Oliver brokers; they had rated their firm well below the rest of the pack in the past two surveys. Last year, its overall IE Quality Score was only 6.2 vs a 7 for Canaccord this year. One former C.M. Oliver broker says of his marks for Canaccord, ‘All of these would be zeroes if we were rating C.M. Oliver … the move from C.M. Oliver is a huge improvement. The compliance and back office at C.M. Oliver were terrible.’

So while Merrill brokers think wistfully of Midland days, Canaccord’s troops see mergers pushing them onward and upward.