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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 helpful.
“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 disappear.
“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 Save252.com, 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 recent purchase 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, Fla. “It was evolutionary. Now it’s become revolutionary because of the crisis.”
