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The Research Line of Business at Bank of America Merrill Lynch consistently ranks as the best research group in the world (1). The quality and accuracy of the groups Research reports is superb and only J.P Morgan comes close to providing services that are equal or superior to what Bank of America Merrill Lynch offers (2). While Research groups across the Financial Services Industry are organized in the same way across the industry and perform similar functions as each other, there are only a handful of firms that deliver above average results and are ranked as being the best. The high rankings these few firms receive come from not only the actual research they publish, but how the reports are distributed and to whom the reports are distributed to.
Up until the introduction of post 2008 regulation, the Research industry was relatively unregulated and the business of selling and buying research was simple (3). Large broker dealers that offered both Clearing and Fully Disclosed services like Bank of America, J.P Morgan, Goldman Sachs, etc, conducted their own research and sold the research to their clients and customers or used the Research internally for trading. These large firms and broker dealer’s main business was not to sell Research, but were in a position to do so due to their size and business they conducted. On the other hand, smaller and more specialized firms and broker dealers that offered a limited amount of products and services like Merrill Lynch, Evercore, Lehman Brothers, etc, conducted their own research and sold the research to their clients and customers or used the Research internally for trading, but were in the primary business of doing Research. As in, these smaller firms’ main business was to conduct, buy, and sell Research. Their business models were built on the foundation of conducting Research in the Financial Services Industry and they did not have all of the services and products a large broker dealer would have to supplement their earnings. Combined, the large broker dealers and the smaller specialized firms, also known as independent shops, made up the entire Financial Services Research Industry and mainly interacted with one another and customers (4).
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However, after the 2008 financial crisis, with the introduction of MiFiD II and MiFIR and the new regulatory requirements imposed on the securities and derivatives markets that impact the pricing and availability of Research reports, broker dealers offering traditional Research services had to change the way they conducted business to remain strategically competitive (5). No longer could firms hire hundreds of analysts and associates and spend hundreds of millions to generate Research reports. The regulatory landscape had changed, the delivery requirements of Research changed, and most importantly, the pricing of Research had changed. Faced with these new changes and shifts in oversight, firms like Bank of America Merrill Lynch had to come up with a way to not only maintain their standing as the best Research firm in the industry but adapt their business to keep up with regulation. While the rest of the Financial Services Industry worked towards being compliant with the new regulation and making internal cost and revenue adjustments, Bank of America Merrill Lynch’s Bryan Moynihan took a different approach. The firm’s CEO decided to change the way the Research reports were going to be distributed and change the interaction the firm had with its Research customers to increase the amount of Research services they required. The logic behind the decisions came from understanding that MiFiD II and other regulation would hurt smaller more specialized boutique firms because of increased costs and less demand for their services and increase competition amongst the large broker dealers that were also in the Research business (6). By aiming to change the way the firm interacted with its customers, Bank of America decided to not only price their services similar to competitor Research in the industry but make their Research more available to current customers, and combine their Research with other products and services Bank of America offers to attract and retain more customers. From an institutional and Ultra High Net Worth perspective, Bank of America Merrill Lynch established a separate broker dealer under the name “U.S Trust”, now “Private Bank”, and conducted its securities business through Merrill Lynch. Customers that met the requirements to be considered UNHW or institutional/accredited investors were not only paying for broker dealer services offered by Bank of America but were able to gain access to Merrill Lynch’s Research as a part of the services the Private Bank and broker dealer were offering. As in, Bank of America bundled its Research services with different parts of the firm and priced their traditional services to also cover the cost of providing the Research (7). The differentiation of the services Bank of America provided not only let the firm gain market share, but be known for making quality Research available to all of its customers for a price perceived less than Research of its competitors. While the cost leadership and focused differentiation strategy worked for one part of the firm, the main challenge the firm faced was how to grow the Research business in the consumer bank using a different approach. Bank of America is a Federally Insured and chartered bank, so its main business, and revenue, comes from traditional banking, not the securities business. With the internet, increased availability of information regarding securities, rise of personalized trading accounts like E-trade and Charles Schwab, and consumer tastes moving towards being able to make free or low cost trades, Bank of America created another broker dealer under the name “Merrill Edge” that sits under the umbrella of “Merrill Lynch” (9) . Merrill Edge functions as the broker dealer and wealth manager for consumer bank clients and clients that did not meet the requirements of being under the UHNW and institutional umbrella. With the introduction of Merrill Edge, Bank of America consumer bank clients could open a trading account for free, make trades at significantly lower costs than competitors, and get access to free Research reports. However, if a customer wanted more insight into a product, service, or security, they had the option of paying for more Research (10). With this new strategy, Bank of America was able to gain market share in the securities industry with consumer bank clients through bundling of services and increase the demand of its Research across all industries and sectors due to consumer and investing needs. By valuing its customers and focusing on how to make their products easily accessible and available to anyone who banks with Bank of America, Bank of America Merrill Lynch has been able to maintain its foothold as the best Research firm in the industry, and grow its reputation for not only providing the best Research on the street, but the cheapest without foregoing quality. Without the strategies implemented as a result of the financial crisis of 2008, Bank of America Merrill Lynch’s Research department would have stagnated and become an example to the industry as to what NOT to do.
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