October 18, 2005

NASD Probes Merrill Lynch 'Call Centers' Inquiry Examines Treatment Of Mom-and-Pop Investors; Settlement Appears Near

By SUSANNE CRAIG
Staff Reporter of THE WALL STREET JOURNAL

The National Association of Securities Dealers has launched an investigation into Merrill Lynch & Co.'s customer "call centers," examining whether the huge Wall Street firm has mistreated some of its clientele of mom-and-pop investors.

The investigation has been under way for some time, according to people familiar with the matter, and the two sides are close to announcing a settlement of an undisclosed sum that also would include other sanctions.

The NASD has been investigating allegations that Merrill failed to supervise some of its employees, and, as a result, that brokers at the firm's two call centers -- where the firm places clients with less than $100,000 in assets -- chose to dump some clients into often unsuitable investments in an attempt to goose firm profits, these people say. The behavior under investigation occurred in 2001 and 2002.

Merrill Lynch spokesman Mark Herr said: "After 2001, Merrill Lynch's advisory center, known to Merrill Lynch clients as the Financial Advisory Center, experienced rapid growth, and in retrospect, suffered some growing pains. Over the last four years we have made a series of changes to improve the operations and management of the FAC. Today the FAC provides outstanding service, and a recent survey found that 86% of clients gave it a 'highly satisfied' rating."

For years, financial-services firms cast a wide net for customers. But the firms have concluded that investors with less than $100,000 typically don't generate enough fees to justify having an individual broker; instead, the firms have targeted more of their energy to their wealthiest clients.

On Wall Street, Merrill Lynch was considered a pioneer in this area when it began diverting clients with smaller accounts to call centers in the mid-1990s. Merrill has two such centers -- one in Hopewell, N.J., another in Jacksonville, Fla. Merrill doesn't disclose how many customers use the centers, but the number is believed to be more than one million.

Merrill said such transfers were good for its clients, noting they could get around-the-clock service seven days a week at a call center, something brokers can't always offer. However, in a 1999 memo that later became public, a district director referred to this class of investors as "poor people," and said advising them was "charity work." The Merrill spokesman said, "Obviously all these clients are valuable to us, and whoever said that was not accurately reflecting how we feel about these customers."

Other firms have followed Merrill's lead in moving smaller accounts to call centers. Morgan Stanley opened its first this year in Salt Lake City, also catering to clients with assets of $100,000 or less.

News of the investigation is likely to broaden to other firms in the wake of the NASD's findings. For its part, Merrill has long fostered an image as catering to average investors. Wall Street firms make most of their money from the affluent, but all take pride in catering to the needs of the ordinary investor. Merrill has boasted about bringing Wall Street to Main Street and embraces its nickname "Mother Merrill," a nod to the maternal instincts it believes it shows its clients.

The strategy to move customers to call centers isn't without risk. For starters, future profits are hard to predict. A young client just starting out in the business world may be worth courting. Such clients placed in call centers might choose simply to take their business to a discount brokerage firm, where fees are often substantially lower.

Former Merrill Lynch customer James Carskadon, 78 years old, pulled his account from the financial titan in 2002, saying he felt betrayed by Merrill when he got a form letter telling him that a move to a call center was in his best interest. He rejected the idea and closed his account. "I felt they had completely shuttled me down the drain," he says.

Mr. Carskadon, a retired Boeing Co. employee from Oregon, this year won a $65,000 award against Merrill Lynch. He says the threat to place his account in a call center came after the firm placed him in unsuitable, risky investments that drove down the value of his initial investment of approximately $110,000 to just $10,000. The money he has left has been placed in an investment retirement account at another financial institution.

Bob Banks, Mr. Carskadon's lawyer, believes people take their money to full-service firms such as Merrill Lynch to get individualized attention, something that flies in the face of a call center. "My client thought he was paying for a personal relationship with a broker," Mr. Banks says.

When Merrill Lynch wanted to move Mr. Carskadon into a call center, it told him it was putting his financial interests first, because he deserved "Merrill Lynch's fullest attention." Since the NASD began investigating, letters Merrill now sends its clients informing them that the firm plans to move them into a call center are more tepid, according to people familiar with the matter, warning about the pros and cons of such a move.

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