Merrill's Teflon Tiger

Can Stanley O'Neal reenergize the brokers?

E. Stanley O'Neal caught the public's attention on Feb. 14 when he was named to lead Merrill Lynch & Co.'s brokerage operation, the nation's biggest. But O'Neal, 48, one of the highest-ranking African Americans on Wall Street, had been marked by Merrill insiders as an up-and-comer years earlier. The executive, who joined Merrill from General Motors Corp. in 1986, is considered a skilled manager and excellent communicator. He even emerged unscathed in 1998 when he was chief financial officer during a bond bloodbath that led to Merrill's first quarterly loss in nine years. "At that point, you knew he was golden within the firm," says a Wall Street analyst.

Now, the rest of the world will find out exactly how golden O'Neal is. The latest promotion appears to make O'Neal the leading candidate to succeed Chairman and Chief Executive David H. Komansky, 60, who's expected to step down in five years. Whether O'Neal ascends to the throne of the nation's largest brokerage firm will likely hinge on one thing: his ability to shepherd Merrill's 14,200 U.S. brokers through the most tumultuous time ever in the retail brokerage industry.

O'Neal's daunting task is to continue to remake a brokerage force that grew up--and grew prosperous--on schmoozing with clients, recommending stocks, and earning rich commissions on every trade. The boom in online trading makes much of that irrelevant. "O'Neal's appointment is indicative of a sea change at Merrill and the brokerage industry in general. Because of the Internet, it's becoming much less of an old-boy's network--they've really got to focus on meeting stated financial goals," says Henry McVey, securities industry analyst at Morgan Stanley Dean Witter.

For Merrill, that means stemming costs in the cushy brokerage business--in order to stay profitable with lower commissions--while offering clients more comprehensive financial planning and other services. In an interview, O'Neal said he plans little change in the strategy of his predecessor, John L. (Launny) Steffens: "Launny has put in place a magnificent business. He's had a clear vision that's proved to be right."

PEACE OFFERING. Where O'Neal may be able to improve on Steffens' record is in patching up brokers' morale. O'Neal's outsider status--he has never worked as a broker--and people skills may help smooth the way as he pushes through needed change. "The biggest obstacle he faces is that brokers aren't happy with the status quo," says Guy Moszkowski, securities industry analyst at Salomon Smith Barney. "The way Merrill introduced a lot of their online strategy was a blow to brokers," adds Mark Elzweig, a brokerage recruiter. In a step that's bound to please brokers, O'Neal says he plans to add bodies to the brokerage ranks: "We need more people--the best we can find."

O'Neal's success reenergizing brokers may well stem from how well he does the other half of his job: ensuring that Merrill's phenomenal growth online isn't primarily coming out of their hides. Thanks largely to the newly introduced Unlimited Advantage account, which charges a fee based on assets rather than generating commissions from trades, Merrill's online brokerage revenues are booming. In the last three months of 1999, assets in its Unlimited Advantage accounts rose from $40 billion to $63 billion. But 86% of the assets are from existing clients. "O'Neal's got to make online work without cannibalizing [traditional] revenue," says Moszkowski. If O'Neal can steer Merrill's brokerage business through these tumultuous times, he may prove himself golden once again.