Why I Left Merrill Lynch
In 2002, I wrote in the TAO for CEOs and Investors (2002 version)
FIRST THINGS FIRST
I am a Financial Advisor. I work for Merrill Lynch where I have served my clients for the last twelve years. Before joining Merrill, I worked for Citibank for ten years as a corporate banker in three countries as an International Staff. I hold a BBA in Economics and a MBA in Finance from New York University’s Stern School of Business.
I am resigning from Merrill Lynch because I consider it the honorable thing to do. I believe top management should resign also. The I CHING demands that CEOs must have “greatness of spirit, consistency, and strength” to lead and hold the corporation together.
· The I CHING says: “Such holding together calls for a central figure around whom other persons may unite. To become a center of influence holding people together is a grave matter and fraught with great responsibility. It requires greatness of spirit, consistency, and strength.
“Therefore let him who wishes to gather others about him ask himself whether he is equal to the undertaking, for anyone attempting the task without a real calling for it only makes confusion worse than if no union at all had taken place. If a man has recognized the necessity for union and does not feel strong enough to function as the center, it is his duty to become a member of some other organic fellowship.”
It has now become evident that Merrill’s top management has lost the greatness of spirit, is seriously lacking in consistency and strength, and should become members of some other organic fellowship.
The I CHING would also demand, in light of such ineptitude and gross negligence, the CEO apply the necessary punishment both to himself as well as to his top management.
- The I CHING says: “Penalties are the individual applications of the law. The laws specify the penalties. Clarity prevails when mild and severe penalties are clearly differentiated, according to the nature of the crimes. This is symbolized by the clarity of lightning. The law is strengthened by a just application of penalties. This is symbolized by the terror of thunder. This clarity and severity have the effect of instilling respect; it is not that the penalties are ends in themselves. The obstructions in the social life of man increase when there is lack of clarity in the penal codes and slackness in executing them. The only way to strengthen the law is to make it clear and to make penalties certain and swift”.
During my 12 years as a Financial Advisor with Merrill Lynch, I gathered $150 million in assets and produced $2 million a year becoming a member of the top producers’ Eagle Club. I became a top producer by holding meetings for my clients every Tuesday where I would hand them the latest recommendations of Merrill Lynch’s research department.
I relied on Merrill’s well known, particularly at the institutional level, research piece called “Global Research Review”. In this monthly publication, Merrill would issue recommendations based on an A,B,C,D risk quality and a 1 to 9 ranking system designed to signal Buy, Hold or Sell recommendations to its clients. In theory this strategy was sound provided the analysts who made buy recommendations when the companies were doing well would issue sell recommendations when the same companies were doing poorly. The system, however, did not work and the evidence lies on the fact that Merrill was forced to make drastic changes to its research system, thus acknowledging serious flaws with its previous system.
Simply put, the product was faulty. It was faulty much like the cigarette that causes cancer and is still deliberately produced, or the car that exploded when hit from the rear and was still made to come out of the assembly line, or the airplane that went into a tailspin because a faulty pump locked the rudder and yet was still produced. In the end, the bean counters won the day at Merrill, and so far, given the small penalties the company has had to pay, they were right.
Why was Merrill’s research faulty? Because Merrill’s top management either encouraged or deliberately looked the other way while the investment bankers pressured the analysts to say only good things about their corporate clients. How could a Merrill analyst issue a sell recommendation of a corporation without risking the relationship between that same corporation and Merrill’s Investment Banking Group? How could an analysts who was sharing in the income of Merrill’s investment banking fees, issue a downgrade of the same corporation that was paying the fee?
By giving excessive power to the Investment Banking Group, such as power over the research group and even over the Financial Advisors (the IBG gave the IPOs mostly to a few selected clients, including its CEOs) Merrill’s top management violated one of management’s most important rules; it assigned social rank based on arbitrary and unjust rules.
- The I CHING says: “Thus the superior man discriminates between high and low, and thereby fortifies the thinking of the people. Heaven and the Lake show a difference of elevation that inheres in the natures of the two, hence no envy arises. Among mankind also there are necessarily differences of elevation; it is impossible to bring about universal equality. But it is important that differences in social rank should not be arbitrary and unjust, for if this occurs, envy and class struggle are the inevitable consequences. If, on the other hand, external differences in rank correspond with differences in inner worth, and if inner worth forms the criterion of external rank, people acquiesce and order reigns in society.”
Yet nowhere in any of Merrill’s research pieces I gave out to my clients every Tuesday, was it ever made public that Merrill had a relation with the corporations we covered or that our analysts received remunerations from our Investment Banking Group’s fees. Surely if the Financial Advisors had known the analysts were receiving bonuses from our Investment Banking Group, they would have never followed their recommendations. And surely had our clients known about it, they would have used Value Line or some other independent research firm. The sad truth is that Merrill’s management betrayed the trust of its clients, shareholders and Financial Advisors by deliberately looking the other way while the Henry Blodgets issued misleading research recommendations.
I remember feeling sick when our CEO sent us an e-mail stating that our clients could not hold us liable because for our clients to sue Merrill they would have to first prove “malicious intent”. For the best known financial institution in Wall Street to come up with such a statement was a sure sign that the much touted Merrill Lynch Principles had been set aside for the next bull market. The McDonald’s employee who served a lady in Albuquerque a boiling hot cup of coffee certainly had no “malicious intent” to cause her second degree burns, yet the damage was done and McDonalds had to pay millions to compensate her for the serious harm she suffered.
Worst still, Merrill’s management began to distance the corporation from its Financial Advisors by hinting in the weekly branch meetings that the Financial Advisors were personally liable for issuing poor recommendations to their clients. Financial Advisors began to realize Merrill Lynch was a bad partner.
The I CHING says: “A king is the symbol of a fatherly man who is richly endowed in mind. He does nothing to make himself feared; on the contrary, the whole family can trust him, because love governs their intercourse. His character of itself exercises the right influence”.
But what made my stay at Merrill even more unbearable was the cocky new policy of its future CEO obsessed with turning Merrill Lynch into a Goldman Sachs, while keeping the Merrill Lynch name. (See On Management)
If Wal-Mart improves its products and personnel and opens a branch in front of Tiffany at Fifth Avenue, how many of those millionaires who have always shopped at Tiffany will cross over Fifth Avenue to buy at Wal-Mart? If Merrill Lynch throws out its clients with accounts below a million dollars, after incurring substantial losses due to poor research recommendations and after years as loyal clients, will that signal to the multimillionaires of the world that now Merrill is like Goldman Sachs? Well, that is exactly what management was doing, while in the process robbing its Financial Advisors of their income by reducing their payout while keeping the commissions from the small clients for itself.
The I CHING says: “Evil is not destructive to the good alone but inevitably destroys itself as well. For evil, which lives solely by negation, cannot continue to exist on its own strength alone. The inferior man himself fares best when held under control by a superior man.”
I guess Marriot’s CEO refused to live solely by negation. By having a group of hotels such as Fairfield Inn, Courtyard, Marriot and J.W. Marriot, he achieved brand differentiation without offending his clients, shareholders or employees.
As I leave Merrill Lynch, I would like to leave its CEO and top management with a simple piece of advice.
- The I CHING says: “When the good elements of society occupy a central position and are in control, the evil elements come under their influence and change for the better. When the spirit of Heaven rules in man, his animal nature also comes under its influence and takes its appropriate place.”
I dearly hope the good elements within Merrill Lynch will occupy the central position and take control of the corporation.
