Analysts issue opinions on Merrill Lynch and TD Ameritrade based on new information

Analysts issued notes last week about two of the industry’s most important players: Merrill Lynch and TD Ameritrade. Both companies are at different stages of emerging from challenging mergers and they’re at much different places — though E*Trade is a wildcard for both.

The note about Merrill Lynch focused on its integration with Bank of America. The majority of Merrill Lynch brokers have now sold banking products, but it’s not clear yet what kind of a referral flow of investors is coming back from Bank of America, according to Alois Pirker, senior analyst, wealth management at Aite Group of Boston.

This finding is important because Merrill Lynch paid a price by being acquired by a bank better known for retail loans and deposits. It lost some of its uniquely collegial culture, its sense of autonomy and its brand name.

The hope for advisors would be that synergies and cross selling would more than make up for what has been lost – though Pirker questions how well this will take hold.

Difficult task

“Bank of America showed that 60% of advisors have already sold a bank product showing that some cross-selling has started to take place” at Merrill Lynch, he writes. “The firm does not say, however, how many retail banking clients have started to bring investments to the firm, a much more difficult task given that Merrill Lynch is typically working with much higher wealth segments than the retail bank.”

He adds that these questions about Merrill’s future are being raised in an atmosphere of lackluster-but-stabilizing results at Merrill Lynch.

“The numbers from their retail brokerage unit, Merrill Lynch, suggest that while the business has not returned yet to its old strength in attracting vast amounts of client assets, key indicators like number of financial advisors and client assets managed have stabilized,” Pirker writes. “This indicates that the firm has now a stable base to grow from and to take advantage of improving markets in 2010. Financial advisors, however, are closely watching the integration, and decisions made throughout this integration process will determine if the financial advisors and their clients will stay at Merrill Lynch in the long run.”

Meanwhile, Morgan Stanley analyst Celeste Mellet Brown writes in a research note that TD Ameritrade faces a very different challenge. It has completed a successful turnaround since TD Waterhouse and Ameritrade merged and now it is sitting on capital that positions it to take action with those reserves. [Cash at a corporation is a concern in the sense that it drives down return on capital, a key metric of success.]

Here are the observations of the Morgan Stanley analyst as published:

Ample room

“We expect Ameritrade to generate $430 million of operating / investing free cash flow in the next three quarters and $1.1 billion in the full year of 2011, which in our view suggests ample room for capital deployment,” Brown writes.

Where Ameritrade is concerned, capital deployment may mean going out and buying a competitor – like E*Trade, according to her note.

“Ameritrade CEO Fred Tomczyk stated that the company was looking at potential acquisitions, issuing a dividend, or buying back shares, though it will not likely act before the end of its fiscal year ending Sept. 30. In terms of potentially acquiring E*Trade, Mr. Tomczyk told Reuters that E*Trade 'is on a better footing today than they were a year or two ago, no question. But that doesn’t mean it’s over, they still have their issues to work out. They’re through the worst,’” she writes.

In other words, it appears that Tomczyk is not ruling out the possibility of acquiring E*Trade.

Likely acquirer of E*Trade

Yet – cash piles notwithstanding – Bank of America/Merrill Lynch is a more likely acquirer of E*Trade than TD Ameritrade, according to Adam Honoré, research director of the capital markets group of Aite Group.

“Everybody thinks that Ameritrade or Schwab would buy [E*Trade],” he says in an RIABiz interview. “I actually think a smart full-service broker would pick them up and create that channel so they can have multiple relationships with a client.”

Honoré says, for instance, that a wealthy client of a wirehouse broker may have children with low asset balances. With E*Trade, a full-service brokerage could better accommodate them.