The $50 billion purchase of Merrill Lynch by Bank of America raises question marks about the brokerage’s future but Merrill’s wealth arm should prosper, said both firms and senior figures in the industry.

In particular, BoA does not have much of a wealth management footprint outside the US, which Merrill does, so the purchase should not lead to many cutbacks because of duplication of functions, industry figures told WealthBriefing.

Observers of the wealth management sector have been trying to figure out how it will be affected by the acquisition, which was announced at the weekend and coincided with the announcement that US investment bank Lehman Brothers has gone into bankruptcy. BoA’s purchase means it will bring more than 16,000 financial advisors from Merrill, creating a giant firm with more than 20,000 advisors.

“Since BoA curtailed its international operations in the past including its disposal of international private banking, the merger with Merrill Lynch makes great sense as two powerful names merge into an even more powerful one and clients will be positively reassured since there is very little duplication between the two giants,” said Ray Soudah, founder of MilleniumAssociates, an M&A consultancy specialising on the wealth industry, based in Switzerland.

"From an international private client perspective, the deal is potentially very solid. The two businesses complement each other," said Sebastian Dovey, managing partner at Scorpio Partnership, a consultancy on the wealth management sector.

"However, in the US the situation will be more complex as BoA has just come through the integration of US Trust and will now be adding to its warehouse a major private client mass market unit," Mr Dovey said. He continued: "The Bank of America deal signals a return to the international private banking stage after more than a decade off the scene. In terms of the future for the global wealth management combined operation, the true question is what does either side bring to the other in terms of enhancements to the product and service offering."

"The deal is being portrayed as a defensive play but it could actually become a smart offense play by the two houses who may well be recognising that we are going through a clear shift in the financial order of power," Mr Dovey added.

The wealth arm of Merrill Lynch, particularly in its European, Middle East and Africa division, will be a positive acquisition for BoA, as it does not have a presence there at present, a person familiar with the matter told WealthBriefing.

Meanwhile, Merrill Lynch chief executive John Thain told a conference call for investors that the acquisition represented a “tremendous strategic fit”. He said: “Merrill Lynch generates 50 per cent of its revenues outside US. We have a strong footprint in India, building Brazil, see opportunity for growth in Russia and China. No matter how you measure Merrill financial advisors, we are leading in the world.”

“If you look at it, this transaction is quite positive from a financial advisors’ view…it gives them the comfort and opportunity that they will have access to BoA retail banking clients,” Mr Thain added. Merrill's wealth business unit is headed by Robert McCann. 

Mr Thain’s counterpart, Ken Lewis, chief executive of BoA, said: “Obviously, we could have rolled the dice and probably got it at a cheaper price if we waited a while – we saw the long term strategic opportunity in the purchase so we decided not to roll the dice and wait.”

Tim Gibson-Tullberg, who runs an eponymous executive search firm in London, said he was relatively sanguine about the future of Merrill’s wealth arm, but cautioned that the existing pay structure, which operates on a brokerage model, could be at risk.

“Merrill Lynch was due to announce a change in bonus structure today and while BoA will be committed to the annuitised wealth management business, its interest in maintaining a brokerage style operation and remuneration structure may be limited,” he said.

“Equally, how clients will react [especially Middle Eastern markets] to the Bank of America name and involvement will be interesting,” he said.

“Given that it would appear that what happens in the US happens here six to eight months later, it will be interesting to see which UK and or European banks feel the blistering heat over time.  UBS must be the lead contender for speculation and the religion that an entity is sacrosanct or will never be sold is proven to be a false belief,” Mr Gibson-Tullberg said

"It is an amazing end to a saga that , if it were written as a story, until a few weeks ago nobody would believe it to be fact, but a rather far fetched fiction story. It shows the importance of trust in the financial markets....but what is a pity is that, as far as we know, the wealth management businesses have been holding up well and will be a jewel in the crown for Bank of America," said Bruce Weatherill, an independent wealth management consultant.

Morgan Stanley said in a research note that the Merrill acquisition was a “strategic positive” for BoA and will be accretive for BoA’s earnings in 2009. As a result, Bank of America will become an industry titan in equity and debt markets and strengthen its brand image outside its home market. However, BoA may face a challenge in retaining some Merrill advisors concerned about the future of the business, it said.

“Really from a domestic US wealth management standpoint, this is an entrée for BoA into middle, high-tier clients. Bank of America already has the high-end business through its purchase of US Trust last year,” said Scott Smith, Cerulli Associates senior analyst.

Merrill Lynch's business is predominantly focused on the $2 million to $20 million range of clients, he said.

“Certainly there have been whisperings in the market that Merrill Lynch has been looking for suitors in the last two to three months. People have been betting on Wachovia but this is a big play of BoA for the 17,000-odd advisors in this space,” Mr Smith said.

Just before the weekend, US bank Citi reiterated its “buy” recommendation on Merrill’s shares. In a note last Friday, it said: “We view the company as well positioned to continue to be able to drive growth from the benefits of significant investments over the past couple of years.”

Over the next couple of years, Citi said it expects a return on equity of 16 to 18 per cent.

Merrill Lynch has been one of the most spectacular casualties of the credit crunch. The losses it suffered in the past 18 months amount to about a quarter of the profits it has made in its 36 years as a listed business.

There have recently been job worries about Merrill. In August, a leaked memo from the firm talking about a hiring freeze sent shockwaves through the world’s financial community. However, what most of the reports neglected to point out was that this new policy does not apply to wealth management.