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Merrill Funds Unit Offers Firm's Brokers an Inside Peek

Jeff Peek, head of Merrill Lynch Asset Management, took his show on the road to win back the hearts of the firm's brokers.

Jeff Peek's office at

Merrill Lynch


, like the others on the firm's 32nd-floor executive suite, is tucked behind walls of dark, imposing paneling and slats of frosted glass.

But Peek, the head of the firm's asset management division, began dragging the unit out from its sheltered New York headquarters and into the field when he spearheaded a May road show intended to win back the hearts of the firm's 15,000 brokers.

That may be easier said than done. Sticking to a value strategy in a decade of growth, Merrill's funds have underperformed peers and earned the scorn of both brokers and their clients. Yet

Merrill Lynch Asset Management

(combined with

Mercury Asset Management

) has $515 billion under management and produces the kind of stable revenue that makes investors and management salivate.

It's key for the fund family to regain the sales force's faith as commission revenue gets squeezed in the battle with online brokers. When a Merrill broker sells a proprietary fund, the firm reaps a steady annual management fee. On an outside fund, the firm only gets a commission and distribution fee.

"It's the most profitable business we have, and they're putting on a full-court press to resell the brokers on the funds," says the manager of one large Merrill branch. Indeed, the wealth management area of Merrill, made up of private client services and asset management, contributed more than 50% to Merrill's $17.5 billion in net revenue in 1998.

For Peek, a former investment banker who took over the division in January 1998, it was a risky move to face a sales force that had come to view its in-house fund family with more than a healthy skepticism.

"I really didn't know what to expect. We felt we needed to go out and make a dramatic showing of our willingness to get feedback," he says of the so-called Framework for Excellence tour that hit 11 major branches in five days. "I came away thinking that our brokers will give our funds every consideration" when dealing with clients.

The biggest issue is, of course, performance. Most bank and brokerage fund families underperform because they have "not had the wherewithal or desire to buy talent. They're understaffed in terms of stars," says fund consultant Geoff Bobroff. He hasn't done consulting for Merrill.

Peek is hiring top-notch managers and marketers, shifting to management styles outside of the value model and encouraging feedback from the troops. He's hired Bob Doll from

Oppenheimer Funds

to run the equity side, Chris Blunt from

Goldman Sachs

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to beef up marketing, and managers such as Paul Meeks from

Jurika & Voyles

, and


TheStreet Recommends

Jim McCall. And, he's scheduled another branch tour in November.

Meeks, who runs technology funds, is a prime example of the new talent. His year-old


Global Technology fund is up 13% this year, beating the

S&P 500

by more than 5%, according to


. "Our goal is to have a high-quality, world-class manager" in each fund discipline, Peek says.

Next up for the fund unit may be some sector funds, index funds and potentially a quant fund. And that's not including its development of insurance carriers, regional banks and smaller regional brokerages as sales outlets for the Merrill or Mercury funds.

"I think they have a lot to do. Merrill has to become a credible player in the eyes of the investing public," Bobroff says. "Its long-term plan is to gather assets and become the investment managers of all the wealth they can get under control." The key to that is getting the brokers to buy into it, especially as their jobs become harder in the face of lower-cost trading firms and as Merrill itself readies a $29.95-per-trade offering.

"Regardless of the environment, it's most important to Merrill for brokers to have confidence in the MLAM funds," says industry analyst Michael Flanagan of

Financial Services Analytics

. "They provide a steady stream of management fees."

Will barnstorming work with the brokers?

"The straws that broke the camel's back were the


Growth fund, which was down big time in 1998

-24.2% and the


Global Allocation fund, which was represented to the sales force as a widows-and-orphans fund, and then bought Russian bonds," says one Merrill broker, who requested anonymity. "In fairness, it has bounced back nicely this year, but the damage has been done."

The Global Allocation fund recently won its fifth star from Morningstar and has returned almost 19% year-to-date -- and is still holding Russian bonds. That won't change the fact that it ranked 79 out of 85 flexible global investment funds in 1998. Merrill's flagship Growth fund got a new manager in January after spending the past three years at the bottom of fund rankings.

Fund family turnarounds can typically take three years as performance gets the attention of investors, says fund consultant Burton Greenwald, who hasn't done consulting for Merrill. Merrill's commitment to selling the brokers, however, may allow it to "take hold faster than you expect. They're taking some positive steps."

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