The Merrill-izing of Goldman?
There was an interesting note in the FT’s Alphaville noting that John Thain is actually not just a dog that you can’t teach new tricks to–he is making Merrill Lynch more like itself than his old shop. It occurs to me that it’s actually Goldman whose business model is easy to copy. Merrill is known for of having an excellent brokerage division and has a strong brand with individual investors. This naturally leads it to have a strong distribution channel for stock offerings, structured products focused on retail investors, and various other financial instruments. This is a franchise that is hard to replicate–it requires advertising, lots of infrastructure and manpower, and lots of work creating a culture whose focus is on keeping retail customers (a very different breed from institutional clients, obviously, on all fronts). Leveraging platforms and systems is both key and difficult. There are extra legal liabilities. Many things make a successful retail operation hard to replicate.
Now, look at Goldman. What is their business model? Essentially, with the exception of their banking business (which is the lower margin business for them), their business model is to take smart people and give them a tight leash (not that it isn’t a long leash, but they keep close tabs and aren’t afraid to shorten it at any time). How difficult is this? I think it’s certainly non-trivial to replicate (Stan O’Neill certainly checked all boxes–more Private Equity investments, more risk taking, same organizational structure as the Goldman boys), but it doesn’t take decades and decades of building a brand with finicky individual investors. One needs to develop a disciplined and well defined method for tracking risk. Their traders need to be a smart and talented bunch (as anyone in the industry knows, not having these kinds of people is a problem you can generally throw money at). Your leaders need to emphasize a free-flow of ideas and cultivate a culture where working together is rewarded. Lastly, your pay structure needs to emphasize both working together and rewarding performance while not providing an perverse incentive to take a big gamble (or, if it does, you need someone high up to monitor the risk positions as a check). These changes all seem very like they could occur (keep in mind it might be a slight shift from the status quo, instead of what would be a glacial re-engineering of a firm) in a much smaller time scale than building a recognized brand amongst the millions of individual investors in the U.S. (speaking nothing of international investors).
Now, I’m not saying that what Goldman is missing is a retail division. I’m also not saying that it’s easy for an investment bank to break into any business (commodities, fixed income trading, currencies, etc.), but it is essentially the case that changing how one practices their craft is different from changing the craft they practice.