Bank of America Corporation (BAC) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Gerard Cassidy with RBC Capital Markets. Welcome to our afternoon session of the Financial Institutions Conference here in 2022. It's my pleasure to introduce Bank of America as the fireside chat participant this afternoon. Really no introduction really needs to be made about Bank of America. It's the second largest bank in our country. The company's market cap is one of the largest in the United States. And with that, it trades today at about 1.3x stated book. But again, the market cap is well over $330 billion. And what we would suggest is that it's one of our best managed large banks as well as evidenced by the work that their Chairman and CEO, Brian Moynihan, has done since the financial crisis of bringing it to where it is today. We're very pleased to have with us Andy Sieg, who's the President of Merrill Lynch Wealth Management. He's responsible for overseeing 25,000 employees. And as of June, it had -- I'm sorry, at the end of the year, it had over $3 trillion of client balances, and it's one of the largest businesses within the Bank of America franchise. But Andy, thank you very much for joining us.

Gerard, it's great to be here. Thank you.

Maybe we can start off. When we look at Merrill Lynch, it's gone through a real big transformation under your leadership. And maybe at the high level, what really makes Merrill different from some of its competitors?

Gerard, thank you. I think 3 things. This business, as you alluded to already, has a tremendous scale. And at -- across our Wealth Management businesses overall, $3.8 trillion in client balances, $4.2 trillion if we include our consumer investments business, 19,000 advisers. The breadth of capabilities in the business, and this is where Merrill Lynch has benefited greatly from being part of Bank of America. And so our ability to offer a very broad platform of capabilities to our clients and to invest behind those with real power. And then, third, the brands in this business, it really stands apart in the marketplace. And the Merrill brand is a powerful one in wealth management. It has been for decades. It will be for decades to come. And it's incumbent upon all of us to live up to that brand. And we do it with advisers to dominate the lists of the top advisers published by all sorts of outlets. Our clients and the strength of the relationships reflects that quality.

Very good. And when you look at the customers of the Merrill Lynch Wealth Management unit or business, you think back to the old days when Merrill Lynch choose to run those commercials. Merrill Lynch is bullish on America, and that's when people were trading their own accounts. And you've shifted rather dramatically away from that, obviously. And so when you see the market disruptions we're seeing today, can you share with us your views on how that affects your business and the way you've now transitioned it, how it might be not as affected as people might appear.

It's a great question, Gerard, and very timely because the Merrill business evolved in an environment as we're seeing. The volatility would be reflected in client activity. This business was best-in-class as a transactional brokerage firm. And today, this business is a much more broad-based adviser for our clients. And -- but within the investment sphere specifically, our client engagement has really shifted to medium- and long-term portfolio building aligned to client goals. obviously, strategy is constructed with an eye to understanding our clients and their risk tolerance. Therefore, we come into periods of heightened volatility with more diversified long-term portfolios that we did in the past. The client reactions volatility tends to be muted, where we see increase in activity. In many cases, it's advisers and clients using [ us ] as a trigger to get together and revisit financial plans, just to ensure that asset allocation still aligns to long-term goals. So while we've been seeing a lot of dialogue and a lot of revisiting of plans, the actual change in underlying portfolios has been pretty limited. We haven't seen either inflows out of equities as volatilities increase nor have we seen a lot of cash being put to work. It's been relatively steady as you go.

Very good. And obviously, Merrill Lynch Wealth Management resides inside the Global Wealth and Investment Management business at Bank of America, which is about 24% to 25% of the consolidated revenue, of course, for your organization. Can you share with us some of the things you're doing to drive organic growth? You had some, if I recall, some record flows into Global Wealth and Investment Management last year. So what are some of the strategies that you're putting in place to drive that organic growth?

Well, thank you. Thanks for pointing toward that, Gerard. Really, when we think about organic growth in a couple of ways. First, has been a focus on doing a great job for our existing clients. So when I talk about that evolution toward what we call the modern Merrill, a much more broad-based multichannel way of engaging our clients, seeing client satisfaction and it reflect this focus. That's a powerful part of the organic growth story. Today, client satisfaction at Merrill is at all-time highs. When we ask our clients about the relationship, we have a 94% client satisfaction level with their adviser and their Merrill relationship. Not surprisingly, clients, therefore, are very willing to refer new clients to their adviser. More specifically with advisers, we've really worked with them in the last 4 or 5 years to make new client development, once again, a key component of the way they operate. All on this call will have heard stories about what it's like to be an adviser in the wealth management industry and much of the narrative has been it's a very tough business early in your career. You're building a set of clients. But then this business becomes easier later because client development takes a backseat. We really tried to step back and reset there and to recognize the fact that our experienced advisers are the best-known advisers in their community, their clients are the most referenceable clients. And therefore, advisers that have been with Merrill 20, 30, even 40 years, should be the most effective in terms of developing new client relationships. The average Merrill adviser in 2016, brought in gross about 2 new clients a year. This year, that experienced adviser will bring in more than 3x that many. We'll bring in about 6.5x and scale that across an adviser force the size of what we have, and that makes a real impact in terms of flows in the business. And then the final component in terms of organic growth, given that we have advisers with the skill and expertise in terms of serving clients and the focus on growth, the challenge for the leadership team is how do we then expand our adviser ranks? And our focus as we go forward is to try to see organic growth manifest itself in terms of a continued growth in the size of our adviser force. The numbers we're targeting are 3% to 4% growth per year over the decade ahead. And we think if we achieve that level of growth, it will put us in a very good position to meet the demands of the market in the 2020s.

And with this organic growth, obviously, I would think that it could be opportunities for inorganic growth within your unit, not a depository, of course, because of the deposit market share numbers that Bank of America has. But any -- what's the advantage to go organic versus inorganic as some of your peers have recently done?

Well, I think that in many cases, inorganic in wealth management, just to unpack that term a little bit, is competitive recruiting of advisers. And rather than focusing on the growth of your existing franchise. If this is the retailing industry, you'd be talking about same-store sales and the importance of same-store sales. We've tried to be really lasered in. Are we experiencing that underlying organic growth? And don't let inorganic strategies, take your eye off the ball. From our perspective, the benefits are severalfold. First of all, it causes an organic growth strategy. It causes you to focus on clients and advisers. As I talked about earlier, you need satisfied clients who are referenceable and you need advisers that have built practices and are coming in every day, thinking about how they can be enjoying same-store sales. Beyond that, another benefit and a very apropos of the dialogue we're having today. From the standpoint of shareholders, this is a far more efficient way to grow. When we look in the market around us, we are seeing very elevated multiples for advisers as they are being recruited firm to firm. When we see some of the levels of competitive recruiting deals, it's very challenging that they're going to produce threshold returns for shareholders. And so we feel that shareholder capital could be best put to work by feeding the growth flywheel that's already here in the business, causing the scale outstanding adviser force that we have to be in a position to acquire, to serve clients well, to generate broad-based revenue streams that lets us once again reinvest in the technology and the people we need to spin the flywheel even faster going forward. So this is a client proposition, it's an adviser proposition and it's a shareholder proposition to focus on organic growth.

No. Very good, very insightful. When you think of the organic growth that you've had, what are some of the key investments that you've made and you're planning to make to continue with that organic growth?

Well, the foundation of the wealth management business is -- it's our core investments platform. And we've invested heavily over the years around our investment advisory program, sometimes called Merrill Lynch One. We're very unique in the wealth management industry, truly having a unified managed account at the core of our investment platform. This enables a great fee transparency to clients. They're paying a single fee, which clients understand and appreciate the clarity. It enables advisers to be able to bring together a wide range of investment vehicles and types within one investment advisory umbrella program. It puts us in a position where appropriate for our CIO to actually be able to oversee and drive client allocation strategically and tactically, when that makes sense. And the streamlined nature of this platform, it gives us a lot of scale and capacity. Rather than having our advisers and clients having to repaper accounts and move from one type of investment advisory program to another, this is a very seamless, very fluid environment for clients. So that's one set of investments. We benefited, as I mentioned earlier, greatly from the fact that Bank of America invests overall well over $3 billion a year in new technology development. Our investment in digital capabilities, whether that's in front of the adviser, our adviser workstation and the quality and capabilities there or even more to the point in front of the client. The fact that the digital experience of our wealth management business is now intertwined with the larger Bank of America, the digital experience our clients have, it manifests Brian Moynihan's overall strategy for the company, which is to enable a client to be able to experience essentially all they need to manage their broad financial life through 1 relationship manager, 1 digital interface. And then finally, we've been -- given the scale of our business, we've been able to put substantial specialist resources in place to support clients and advisers as they do broaden out and do more with us. And so for example, we don't just make the banking capabilities of Bank of America, the consumer bank available to Merrill Lynch clients. By the end of the year, we're going to have 800 wealth management banking specialists across the Merrill field organization who come in every day, playing a role essentially as a concierge to make Bank of America more accessible to Merrill clients and Merrill advisers. There's another couple of hundred of those specialists who just focus on the lending activity that we do with Merrill clients. At the high-end commercial loans that Merrill clients have, there's a team of 50 very highly trained, very specialized commercial lenders who work with our advisers and their clients. And so these areas, core investments, digital, the specialist resources we need to really unlock the power of the organization. Those are some areas we put a lot of investment behind and they've helped us spin that growth flywheel.

And we've been talking here about how Merrill has transformed itself from the old wirehouse days to now a full relationship wealth manager with its clients. Is it then inherently more profitable? Do you believe, based upon what Merrill used to be versus the relationships now that you have with these customers are, I would assume, deeper and more profitable?

Yes. I mean it is inherently more profitable for at least 3 reasons: one, when you think about the profile of the revenue streams in the business, the business has tilted much more in the direction of net interest margin than it had been previously. And so you begin to see the addition of banking-oriented margins in a wealth management business. And so as we move forward and more and more Merrill clients are engaging with us fully, their checking and savings accounts are here, their mortgages are with us. You'll see margin improvement as that exposure to banking increases. Second, when I talked about Merrill One and this ongoing simplification and streamlining of our platform, the business is becoming more profitable because our focus in terms of how we serve clients is becoming more uniform. We're able, therefore, to streamline and to simplify in areas where we've had subscale capabilities or duplicative capabilities. We've been very rigorous now for a decade, sunsetting those capabilities, and that's also margin expanding. And then lastly, there's a lot about this business, very similar to the asset management business where there are just scale economies at the core of our business. And client balances can increase. The reach of our advisers can increase on the increment, without the need to add to the fixed cost base. So scale economies here are powerful. And we intend for this to be a growing business over time. As those 3 engines fire, there will be an opportunity to see and enjoy margin expansion.

Very good. You talked already about just the full suite of products that the adviser has at their disposal to work with their customers to build out their -- or to satisfy their financial needs. How big of a competitive advantage is that over some of the other players out there that just don't have the breadth of products that your advisers have access to?

Well, it's a great question. The way we think about it, Gerard, this should be a dream for clients and a nightmare for competitors. Dream for clients because they can come to a single adviser and that adviser can serve them across all aspects of their financial life. As you were leaning toward a nightmare for competitors, who, in almost every circumstance, can only deliver part of the product set. That waterfront, it's with core traditional brokerage products being able to gauge in secondary and new issue securities transactions. This core fiduciary investment platform where we have long-term fee-based investment portfolios. We have the largest deepest, broadest trust and estate capabilities and trust platform in the market with the routes back through U.S. Trust and other predecessor trust companies. Our lending capabilities are at great scale. There's more than $200 billion of loans outstanding to wealth management clients alone, a mix of mortgages, securities-based loans and what we call customer structured loans, more commercial loans with a broad base of collateral types. And then finally, the full suite of consumer banking capabilities and access, of course, to 4,000 consumer branches across the country. And so that -- this was 5 decades, 6 decades ago at Merrill Lynch. There was an aspiration that one day, Merrill Lynch as a wealth manager would be in a position to do it all for clients. That was the genesis of CMA, the cash management account. Today in 2022, that future is very real, and we think we stand apart in terms of that ability to do it all for our clients.

Yes. No, those are the days when Don Regan ran Merrill back in the '80s. So yes -- no, it was very good. Yes? Absolutely. And I believe Bank One had that original CMA account today with Merrill?

Yes.

Yes, that's right. You mentioned the consumer side being integrated into the Merrill Lynch Wealth Management area. Bank of America has got a very strong preferred rewards program as you're aware of, obviously. How does that play into your business, that program? How do you try to leverage that program to further your relationships with your clients?

Well, the consumer team and Aron Levine in a very direct way, [indiscernible] in Asia, they develop the Preferred Rewards program in many ways as a category killer in terms of the ability to offer rewards across the full breadth of initially consumer banking relationships. It kind of manifested the shift that Brian was driving across the company going from being product-oriented to being client-oriented. And as we extended that to wealth management, our clients, first of all, immediately have been able to avail themselves of the Preferred Rewards program and therefore, enjoy the broadest set of capabilities and the greatest value in terms of how they're priced that you can experience in consumer banking. And so you'd expect wealth management clients to be our best clients, and they should have that treatment in the consumer bank, but that's not the case with many firms that we compete against. It's given us a platform to extend the Preferred Rewards program with additional tiers to more and more high net worth clients, which we've been doing over the last 6 months. In our business, we serve many segments of clients in wealth management, as you would expect. There's a very distinct segment that focuses on these rewards programs. And so our advisers are -- they're very adept at knowing at which client is going to respond most powerfully to the additional reward points on the card or the pricing benefits that come from Preferred Rewards. And therefore, they use this program as a competitive weapon when they're in a -- when they're pitching and trying to win new clients. And so again, we feel that this is an important part of the equation that makes Bank of America plus Merrill Lynch so strong in wealth management.

And following up on those comments, Andy, obviously, Bank of America in your area, has clients that are mass affluent to the ultra high net worth customers. And your relatively new product, the Merrill Edge self-directed offering, how has that been in attracting new customers to Merrill? And how many of those customers actually come from the consumer side of Bank of America?

The -- I think there's no more powerful organic growth story in the last decade in wealth management than the growth of our consumer investments business, Merrill Edge. That was a $40 billion business a decade ago. It's pushing $400 billion today, and it is a pure organic growth story. The business has grown with great efficiency. We have not spent the amount of money on marketing yet, that some of our competitors have because the business has grown up in a way that is just intertwined with our consumer bank proposition. The business was largely self-direct brokerage over most of the last 10 years. But we have added long-term fee-based investment capabilities to the business, essentially through the Merrill Guided Investing program, our own robo adviser, again, built organically. And that is now one of the largest robo programs in the market. Clients utilize it either self-directed or with an adviser as part of the program. And what we're seeing, and I think where you went, there's a very powerful client development proposition here where a client may begin as a consumer bank customer, a Bank of America. It is very easy to open a self-direct investment account, free trading and best-in-class capabilities. From there as the client, has longer-term goals or grows more -- develop more confidence in us as a wealth provider. They begin using the Merrill Guided Investing program. And then as their lives become more complicated, as the investment balances increase with greater frequency, a Merrill financial adviser is being involved in a more traditional Merrill Lynch fashion. That integrated client development proposition is -- we think is powerful for clients because it gives them continuity, confidence trust over time. They can access our capabilities as they need them. And from our perspective, it puts us in a position to bring what we do in wealth management to the broadest possible swath of 60 million, ultimately Bank of America customers. So for as much success as there's been growing the Edge business or nearly $150 billion of organic flows we had in the wealth management business last year, we think we're in the early innings in terms of what's possible for growth.

That's -- those are impressive numbers. No doubt about it. This concept of having multiple products at the disposal of the advisers is so strong. And it seems to me that one of the ultimate goals of banking organizations is to get this cross selling multiple products to their customers. And it's not just in the consumer area, as you described, you've got commercial products and such. How do you break down the silos of somebody in commercial banking has a really good customer and they're going to have to hand them off to somebody in the private wealth, in the Merrill Lynch area. How do you incentivize everybody to work together on the team and not worry about somebody that's going to drop the ball and potentially hurt that relationship of the commercial banker that they have with that person after they handed the person off?

Well, the first thing that comes to mind is Peter Drucker's famous line, the culture eats strategy for lunch. And so this is a strategic notion that every company in financial services has talked about for decades. But at the core, this is a cultural transformation that enables a company to serve clients in the way you described. And when Brian became CEO, the shift across this company from being product-oriented and in his view, too siloed to being a company that is built around clients. That was a cultural imperative. And the strategies and operational changes flowed from that. Even down to personnel and HR matters because what you discover, of course, over time is some people can dance differently as that music changes and others no longer fit in the company. And I think over the course of now a dozen years, as Brian has been CEO, the silos are down, and there's a level of trust across the company, how my peers and I work together. But then more powerfully in local markets how our 8 lines of business interact in a local market. And as you and many listening to the broadcast are no doubt aware, we've got 93 Bank of America market presidents and they represent a selection of some of those are Merrill Lynch leaders locally. Some of those are commercial banking or consumer banking leaders. But in key markets around the country, this market president essentially is the CEO of Bank of America in that community. And their job is to cause this level of client focus and collaboration to manifest itself locally in the same way that Brian's manifested across the executive team in New York.

Very good. And those 93 presidents are obviously, as you said, the face of Bank of America in those communities. And it's obviously worked well for your organization. Maybe we're running out of time here. Maybe we could wrap up with maybe 1 more question, which is it looked like the reported pretax margin of your business in the last couple of quarters is about 30%. What are your thoughts about where maybe it could go from here?

My first thought is that I'm not going to break any new ground on that topic today. But as you've seen, there's been strong and steady progress in terms of wealth management margins. We talked earlier, some of that is just operational blocking and tackling, streamlining the business, simplifying the proposition. Some of it is the business mix shifting and some of its continued scale. So I'm optimistic that across the cycle, you'll see us operating this business with upside in terms of margin levels from here. But I'm not in a position today to plant any new flags in the ground other than to say we're very bullish about the future of this business.

No, that's fair enough. And I really want to thank you for your time. Very good content, and I think everybody listening really got a lot out of it. So Andy, thank you so much. Really appreciate it.

Thank you, Gerard. Thank you.

You're very...