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Merrill Lynch: "Consults 3.0" Will Shake Things Up

By Sean

Large distributors are exerting ever greater influence over fund flows. Asset managers without access to these platforms are at a significant disadvantage. These are often the smaller players that are less able to offer favorable revenue sharing agreements or support the ongoing sales and marketing needs of large distributors like Merrill Lynch, UBS, or Wachovia.

All this may change. Though no public announcement has been made, Merrill Lynch is rumored to have plans to create a new distribution platform, commonly referred to as Consults 3.0. Under Consults 3.0, Merrill would assume control for all of the buy/sell orders of the funds on its platform, meaning that firms would have to pass along this information in advance.

Instead of the 40 - 50 basis points paid to firms on Consults, Consults 3.0 participants would reportedly receive 20 - 25 basis points to account for Merrill's assumption of clearing responsibilities. However, given Merrill's scale, these costs would be relatively low. So what does this mean for asset management firms?

Here's our initial perspective on the winners and losers in a Consults 3.0 world:

Winners: Smaller firms willing to hand over the buy/sell decisions in order to gain access to the distribution opportunities promised by the platform.

Losers: Larger firms unwilling to see their fees cut in half or hand over information pertaining to the strategies of their funds.

Other potential implications include:

Marketing & Sales: Because the fund companies managing the underlying portfolios within Consults 3.0 will most likely not be transparent to advisors, branch-level wholesaling and other types of marketing support will no longer be as important as they have been in the current environment.

National Accounts: However, National Accounts will still play an important role in positioning products to achieve shelf space. However, sales approaches will need to become increasingly analytical in nature as distributors' research teams increasingly become the primary decision-makers.

The most significant roadblock is:

Competitive Intelligence: Although Merrill Lynch divested itself of its asset management capabilities, many firms will still draw concerns from having to hand over their buy/sell decisions.

Though no formal plans or timetable has been set, it's becoming clear that large distributors are looking for ways to leverage their scale to increase profits. This could have a dramatic impact on fund distribution. And while Merrill Lynch is the first name to be associated with such plans, consider that others will likely follow if Consults 3.0 is a success. SmithBarney's parent, Citigroup, recently divested itself of asset management, just as was done by Merrill Lynch. Fund companies should monitor this trend and consider the implications for their longer-term distribution strategies.