Merrill brokers seen benefiting from sale of BlackRock stake

A sale of Bank of America’s 34% stake in BlackRock Inc. could be good news for Merrill Lynch brokers who are worried about conflict-of-interest issues with clients, experts contend.

Ever since BofA bought Merrill last year, rumors have circulated that the firm would sell its stake in BlackRock. But reports last week by both Bloomberg and The Wall Street Journal, citing unnamed sources, said that the bank has deemed its holdings in BlackRock non-core and is considering reducing or selling its entire stake in the asset management company.

A sale of the 64.7 million common and preferred shares in BlackRock could make it easier for Merrill’s 15,000 brokers to sell BlackRock funds, because it would remove any possibility of a potential conflict of interest, particularly in light of the financial-reform legislation, said Sean Cunniff, research director at The Tower Group Inc.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires the Securities and Exchange Commission to conduct a study, due early next year, which contrasts brokers’ product suitability standard with the fiduciary standard requiring financial advisers to make customers’ interests paramount. After the study is complete, the SEC may then write a new fiduciary standard for brokers.

With that hanging over brokers’ heads, many may be hesitant to sell any funds that could be perceived as proprietary, Mr. Cunniff said.

“A BofA sale of its stake in BlackRock would remove one layer of conflict of interest for Merrill brokers,” he said.

Given Merrill’s unique relationship with BlackRock, it is a given that the firm is a big distributor of the latter’s funds, said Jason Weyeneth, an analyst at Sterne Agee & Leach Inc. Before Merrill’s merger with BofA, it acquired a 49.9% stake in BlackRock when it sold its Merrill Lynch Asset Management unit to the company in 2006.

“For a while, there were distribution agreements that were somewhat exclusive between BlackRock and Merrill,” Mr. Weyeneth said. “But one of the pushes that BlackRock has been making over time is to increase its retail distribution, so the percentage of business coming from Merrill has been declining.”

Mr. Weyeneth couldn’t say what percentage of BlackRock’s retail sales come from Merrill.

BlackRock spokeswoman Bobbie Collins and BofA spokesman Jerry Dubrowski declined to comment.

A sale of BlackRock could actually help the firm with its goal to build its retail distribution, said Dennis Gallant, president of Gallant Distribution Consulting.

“Some broker-dealers may not allow BlackRock into their platforms, because of its affiliation with Merrill,” he said. “This would address that issue.”

If BofA sells its BlackRock stake, it isn’t clear whether the latter will buy the shares itself, observers said. The firm has been focused on growth, and it would be surprising to see it use so much capital in one transaction, Mr. Weyeneth said.

“It depends on the timing,” he said. “If Bank of America is looking to get rid of its stake over a few years, BlackRock could buy the equity over time, but I don’t see them buying it all in the next six months.”

E-mail Jessica Toonkel at [email protected].

Related Topics: BlackRock Inc., Merrill Lynch