By opting to woo small investors to Wall Street, Charles Merrill revolutionized the brokerage business.
Charles E. Merrill was born in Jacksonville, Florida, in 1885. After elementary school, he attended Worcester Academy in Massachusetts and then went on to Amherst College. He soon transferred to Michigan Law School but left to play a season of minor-league baseball. Soon it became clear that Merrill did not have the athletic talent to make the major leagues, and he searched elsewhere for a career. He accepted an offer from his prospective father-in-law of a post at Patchogue-Plymouth Mills, but he lost the job as a result of the financial panic of 1907.
In 1909, Merrill took a sales position at the investment house of George H. Burr & Company. At the time, the business was restricted to a few investors. Merrill thought it could be expanded to offer services to middle-class individuals, but he soon realized that common stocks, rather than the corporate bonds his company traded, were more appropriate for small investors.
In 1911, Merrill wrote an article titled “Mr. Average Investor” for Leslie’s Illustrated Weekly. In the article, he set down the principles that would guide his professional career. Merrill noted that most stockbrokers placed the interests of their firms over those of the customers. It was common for sales managers to tell brokers which stocks they were to tout, either because their firms had large interests in the shares and wanted to boost their prices or because they hoped to dump the shares before the price collapsed. Brokers tended to concentrate on short-term results rather than on developing long-term relationships with their customers. Not only would the latter approach be more ethical, wrote Merrill, but it would be more profitable as well. He wrote that having “thousands of customers scattered throughout the United States is infinitely preferable to being dependent on the fluctuating buying power of a smaller and perhaps on the whole wealthier group of investors in any one section.” Later, Merrill would state, “The customer may not always be right, but he has rights.”
In 1913, Merrill moved to Eastman Dillon as sales manager. In January of the following year, he left to create Charles E. Merrill & Company, with his friend Edmund Lynch joining him soon after, whereupon the firm became Merrill Lynch & Company. They made a good team. Merrill was an imaginative extrovert, whereas Lynch was a dour man, always fearful of failure. Without Lynch, Merrill might have plunged into unwise ventures; without Merrill, Lynch would have been a mildly successful broker.
After serving in the military during World War I, Merrill and Lynch returned to the firm, which in their absence had been run by associates. Merrill added underwriting to the brokerage business, specializing in retail stores—this was perhaps natural considering his interest in sales. He handled underwritings for such firms as Grand Union, Western Auto Supply, J. C. Penney, and National Tea. The firm also invested in several new companies, among them the Pathé Exchange, a film company later sold to Joseph Kennedy. With the proceeds, Merrill Lynch purchased Safeway Stores,
Merrill was not a major Wall Street figure during the “great bull market”
By early 1928, Merrill had become convinced that stock prices bore no relation to reality. In March, he suggested that his clients lighten their portfolios: “Now is the time to get out of debt. We do not urge that you sell securities indiscriminately, but we do advise in no uncertain terms that you take advantage of present high prices and put your own financial house in order.” Shortly after the stock market crash in October, 1929, Merrill transferred all his brokerage clients and employees to E. A. Pierce, invested five million dollars in that firm, and went into semiretirement.
Lynch died in 1938, forcing Merrill to put in more time at the office. The following year, E. A. Pierce experienced difficulties, and, at the urging of an old associate, Winthrop Smith, Merrill absorbed it and another, much smaller brokerage house. With the transaction, Merrill Lynch was transformed into Merrill Lynch, Pierce & Cassatt. In 1941, Merrill purchased New Orleans-based brokerage Fenner & Beane. Out of this purchase came Merrill Lynch, Pierce, Fenner & Beane. It was a substantial operation, the nation’s largest, with close to one hundred branch offices.
Merrill suffered a heart attack three years later. He returned to his firm soon after, but for the rest of his life he worked on a part-time basis. Smith assumed day-to-day leadership, presaging the firm’s later name of Merrill Lynch, Pierce, Fenner & Smith. Merrill concentrated on development of the firm’s sales operations and public relations. It was in this area that he made his signal contribution, transforming the nature of brokerage and helping to create the first market based on widespread participation. In effect, he democratized share ownership.
Merrill hoped to convince a public with memories of the market crash of 1929 that investment in stocks was prudent and that brokers could be honorable and forthright at a time when they were perceived as hustlers. Some brokers working out of marginal houses were making telephone calls to lists of prospective clients, hoping to snare the unsuspecting with supposed bargains or tips. Such brokers, who had more in common with racetrack touts than with bankers, harmed the reputation of others. Many of their customers did not mind their practices, however, as those customers were gamblers, hoping one or another of the low-priced stocks they favored would shoot up in value. Such occurrences were less likely than brokers suggested.
Merrill thought that the public had to be convinced of brokers’ scrupulous honesty. If potential small investors could be persuaded that a broker was a professional in every sense of the term, they might be induced to use his or her services. Honest brokers traditionally had ignored small investors. They discouraged individuals with only a few hundred dollars from investing, as the low commissions and small fees such investors generated were hardly worth the brokers’ trouble of consultation, planning, and management. Merrill argued that although newcomers to the market usually started with small investments, in time, if they had good experiences, they might become more substantial investors. In effect, Merrill hoped to do for brokerage what chain stores had done for retailing: make smaller profits per client but lure many more of them.
The New York Stock Exchange
During this period, Merrill Lynch brokers were paid salaries rather than the usual commissions, and Merrill made certain that the public knew this. Brokers at other firms therefore had an incentive to encourage clients to buy and sell stocks, as their incomes depended on the commissions generated by trades. Brokers at Merrill Lynch had no such incentives. Merrill substituted a true trainee program for the casual ones then prevalent. He stressed his first precept, that the interests of customers must come first.
Merrill Lynch was not the first brokerage to advertise, but it carried the art to new levels. In the past, advertisements either were simple statements of availability of services or were blatantly sensationalist. Merrill Lynch was interested in educating potential customers. One of its advertisements, headlined “What Everybody Ought to Know About the Stock and Bond Business,” was a long essay that read more like a textbook than an advertisement. Merrill Lynch was besieged with requests for reprints and eventually distributed more than one million copies. The firm also published a series of booklets on investing and made them available free for the asking. One of the more popular of these was How to Read a Financial Statement. A version of this publication, first offered in 1946, was still being distributed at the end of the twentieth century. The firm also warned novice investors away from exotic trading more suitable for sophisticated accounts. Accordingly, another brochure was titled Hedging: Insurance Policy or Lottery Ticket?
The approach to small investors worked. Merrill Lynch became a powerhouse of finance. By 1955, the firm handled 10 percent of the transactions at the New York Stock Exchange and 18 percent of the odd-lot business (trades not in even lots of one hundred shares). Its gross income came to $45.6 million in 1950; four years later it was $73.3 million.
Merrill Lynch’s success led other houses to imitate its methods, and in this way Merrill set the tone for the industry. Other firms patterned themselves after Merrill Lynch in all matters except broker commissions. As trading volume increased and commissions rose, Merrill Lynch too abandoned fixed salaries and paid commissions.
The alteration of public attitudes toward stock investing that Merrill sought took time. As late as 1952, according to a report by the New York Stock Exchange, only 6.5 million Americans were shareholders; that is, one of every twenty-four Americans held stocks. By 1970, the number of American shareholders had risen to 30.9 million, or one of every six Americans.
More than anyone before his time, Charles Merrill remade the face of the American securities business. As trading volume increased, partly because of the influx of new clients, brokers made a great deal of money on commissions. By the 1960’s, it was not at all unusual for brokers to draw larger paychecks than did investment bankers. The best became superstars with large client bases that could be transferred should the brokers decide to change companies. Brokers at major houses no longer had to be hucksters. Backed by a large staff of researchers, the broker of the 1960’s was deemed a professional in every sense of the word. Bright young college graduates flocked to Wall Street, where they hoped to become brokers.
As for Merrill Lynch itself, in the 1960’s and 1970’s the firm expanded sharply and entered new areas of business. As the nation’s center of gravity moved southward and westward, Merrill Lynch opened new offices in those regions. Under the leadership of Donald Regan, who in 1981 left to take the post of secretary of the treasury and later White House chief of staff, the company entered the areas of insurance and real estate, among others.
Investment methods changed drastically in the century following Merrill Lynch’s founding. For instance, many new investment instruments were developed, such as new forms of government bonds issued by agencies, certificates of deposit, options, and money market funds. Changes in investment techniques required increased sophistication, and markets became global. Merrill Lynch responded by introducing new services and products, such as its Cash Management Account, built around a money market fund and first offered in 1977. In cooperation with Bank One, Merrill Lynch created a unified account into which investors might put all their assets, including stocks, bonds, mutual funds, savings and checking accounts, and even their homes.
In the 1970’s, declining trading activity and deregulation caused more than one hundred American brokerage firms to close down. Merrill Lynch was there to pick up the pieces, hiring top brokers who found themselves jobless. In 1978, under Regan’s leadership, Merrill Lynch acquired White Weld, itself a significant force in the industry.
When the increased complexity of investments began to lead many investors to mutual funds rather than individual stocks, brokerage profits declined. Merrill Lynch did not offer mutual funds while Charles Merrill headed the firm. Merrill believed them to be “unnecessary intermediaries” and thought customers would prefer to organize their own portfolios with the help of his account executives. After Merrill’s death in 1956, Merrill Lynch adjusted to the markets and created its own family of funds. By 1993, its mutual fund operation was second in size only to Fidelity in assets under management.
During the 1980’s, the firm expanded into the financing of hostile takeovers and leveraged buyouts and became a major force in the “Ginnie Mae” market, the market for bonds issued by the Government National Mortgage Association to back home mortgages. It also remained a leader in underwritings and sales. Merrill Lynch built on Merrill’s insight that insufficient attention was being paid to small investors by developing its trust and estate operations. In 2000, Merrill Lynch joined with HSBC to form the first-ever global online investment and banking service, which was later integrated into the HSBC Group. In the same year, the firm merged with Herzog Heine Geduld.
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Brooks, John. Once in Golconda: A True Drama of Wall Street, 1920-1938. 1969. Reprint. New York: John Wiley & Sons, 1999. A study of Wall Street in the 1950’s by a master historian, with an analysis of Merrill Lynch’s role in the market. -
Carosso, Vincent. Investment Banking in America. Cambridge, England: Cambridge University Press, 1970. The classic history of American investment banking. Provides good background for understanding Merrill’s position in its history. -
Ferris, Paul. The Master Bankers: Controlling the World’s Finances. New York: Morrow, 1984. A survey of the banking scene in the mid-1980’s. Includes a section dealing with Merrill Lynch. -
Fraser, Steve. Every Man a Speculator: A History of Wall Street in American Life. San Francisco: HarperCollins, 2005. Addresses the impacts that the business of Wall Street has had on American values and democracy, from the Revolutionary War period to the present day. -
Geisst, Charles R. One Hundred Years of Wall Street. New York: McGraw-Hill, 1999. Discusses the most important events in Wall Street history, and the people involved in those events, from the end of the nineteenth century to the end of the twentieth. Many illustrations, including cartoons, charts, and photographs. -
Hecht, Henry, ed. A Legacy of Leadership: Merrill Lynch, 1885-1985. New York: Merrill Lynch, 1985. A collection of essays and documents relating to the history of Merrill Lynch, published privately by the company. -
Merrill, Charles E., and E. A. Pierce. “The Policies That Guide Us.” In Classics II, edited by Charles D. Ellis with James R. Vertin. Homewood, Ill.: Dow Jones Irwin, 1991. Merrill’s statement of principles, first published in 1940, indicates the policies that made Merrill Lynch so successful. -
Regan, Donald T. A View from the Street. New York: New American Library, 1972. A survey of Wall Street’s prospects and problems in the early 1970’s. Also discusses the structure of Merrill Lynch and related issues. -
Sobel, Robert. NYSE: A History of the New York Stock Exchange, 1935-1975. New York: Weybright & Talley, 1976. Contains a discussion of the impact that Merrill and his company had on the securities business. -
Spragins, Ellyn E. “At Merrill, a Frustrating Hunt for Profits.” The New York Times Magazine, June 10, 1990, 52-55, 73-77. Contains material on the early years at Merrill Lynch and the changes that have taken place since Merrill’s death.
Panic of 1907
U.S. Stock Market Crashes
Securities and Exchange Commission Is Established