The wealth manager arm of Bank of America (BofA) expects to further increase its custom structured note offerings from third-party issuers in 2025.

Merrill Lynch, Pierce, Fenner & Smith (Merrill) has forged ahead with its bespoke solutions of structured notes for ultra high net worth (UHNW) clients on the back of a new complimentary framework.

Introduced this year, the framework has allowed the distributor to access certain issuers identified as global systemically important banks (G-SIBs) including Goldman Sachs.

In view of the adoption of technology and modernization of tools, we feel that the concept of mass personalization in the UHNW space will take place - Anil Varughese

“Clients continue to require high-quality geographically diverse issuers. The custom offerings have been well received and are expected grow in 2025.” said Anil Varughese (pictured), managing director, head of structuring and origination for market linked investments (MLIs) and UHNW solutions at Merrill.

“In view of the adoption of technology and modernization of tools, we feel that the concept of mass personalization in the UHNW space will take place, which is highly predicated on delivering a custom offer.”

The past two years has seen the US structured note market pivot towards the advisor segment, according to Varughese. This is going to be “the core opportunity” for Merrill to expand its MLI footprint among UHNW investors which are defined as clients with at least US$5m in combined assets at Merrill and BofA or at least US$10m in investable assets. 

The focus aligns with Merrill’s campaign of expanded personalised solutions through ‘premium access strategies’, a suite of third-party offerings reviewed by the chief investment office, starting in October 2022.

For MLIs, the custom segment highly concentrates on yield enhancement products led by phoenix autocallable structure with a typical minimum trade size of US$3m, said Varughese.

Meanwhile, ready-made structured notes, known as ‘calendars’, feature a more balanced product mix and remains the core business by accounting for about 90% of the MLI assets raised by Merrill.

The full-service broker-dealer, also referred to as ‘wirehouse’, currently has north of US$17 billion assets in MLIs with averaged maturity of two years, which are predominantly structured notes registered with the US Securities and Exchange Commission (SEC).

Credit diversification

Approximately 80% of the assets comes from products on the paper of third-party issuers led by Canadian players: Royal Bank of Canada (RBC), the Canadian Imperial Bank of Commerce (CIBC), TD Securities, Scotiabank, National Bank of Canada (NBC), HBSC, Goldman Sachs and BNP Paribas.

“Our goal is to help complement the existing suite of issuers by incrementally adding access to allow clients opportunities for further credit diversification,” said Varughese.

As of 30 September, Merrill wealth management recorded US$3.5 trillion client balances, a 18.4% increase from a year ago. Its revenue for the first nine months climbed 7.0% to US$14.1 billion, according to BofA’s latest earnings report.

There were 18,916 wealth advisors employed by BofA as of the end of 2023. The US banking giant has since stopped disclosing the headcount.

At Merrill, the client-centred framework rests on trade execution with an open architecture approach as well as a differentiated set of access for investors to maximize yield through diverse sources of assets, said Varughese.

The wealth manager is on track to break its record for MLIs in over a decade with estimated US$14 billion gross sales by year-end, having achieved US$12 billion. This compares to US$9.0 billion, US$9.2 billion, and US$10.5 billion for 2023, 2022 and 2021, respectively.  

By year-end, 90% of the MLI traded notional is projected to derive from calendars sales. “It is a way for clients to help build portfolios and achieve their long-term goals, involving retirement, children’s education among others,” said Varughese. “So, it’s more of a strategic deliverable as opposed to tactical implementation.”

While equity remains dominant underlying asset class, the structured product specialist has observed a renewed interest in cross-asset solutions including commodity-linked notes over the past year, such as one-year digital notes on WTI crude oil futures.

The SEC-registered structured note market is on pace to hit US$140 billion based on street views after reaching record US$105.4 billion in traded notional in the first nine months of the year, as SRP reported.

In addition, exempted notes under Regulation S for non-US investors are set to deliver sales of US$1 billion at Merrill, nearing a record high. There is additionally a fraction of exempted notes under 3(a)(2) programmes for onshore investors, according to Varughese.

“We’ve started to revolve around a multi-year commitment to growing fiduciary balances,” he said.

Merrill is the recipient of the Best Distributor, USA and the Best Performance, USA at the SRP Americas Awards 2024.

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