Manning the Phones

When wirehouses and other major brokerages introduced the notion of call centers a couple of years ago, brokers were suspicious. Although they understood the logic behind the move (to cut costs by giving smaller clients a less costly form of service), it was a difficult adjustment. Brokers told Registered Rep. that they feared that instead of boosting their incomes (by forcing brokers to concentrate

When wirehouses and other major brokerages introduced the notion of call centers a couple of years ago, brokers were suspicious. Although they understood the logic behind the move (to cut costs by giving smaller clients a less costly form of service), it was a difficult adjustment. Brokers told Registered Rep. that they feared that instead of boosting their incomes (by forcing brokers to concentrate on finding relatively affluent clients) it would hurt brokers because they would not be able to “grow” smaller clients into bigger fee-spinners as their portfolios grew.

Some reps at Merrill Lynch still grumble, but they have learned to live with the new system. And the No. 1 brokerage says the program has been a resounding success. Today, more than one million Merrill accounts are handled by 300 registered reps who operate out of call centers in Hopewell, N.J. and Jacksonville, Fla. Prudential Securities also has a call center, with a lower account minimum.

But call centers are here to stay and brokers are learning to live with — if not love — them. A number of other brokerages have set up call centers, including Morgan Stanley and Wells Fargo, and analysts believe with the ascendancy of the fee-based advisory model, the majority of investors, those with less than $100,000, will soon be doing their business entirely over the phone. Other firms will follow the lead of firms such as Merrill and Pru.

“All the firms are looking to go to Merrill's model over time,” says Dan Burke, analyst at Gomez in Waltham, Mass. And the competitors are noting how Merrill seems to be keeping the customers satisfied, despite the lack of face time with a dedicated rep (call center clients are often assigned to a team, but may not get the same advisor on every call). “People have to feel confident when they call these 800 numbers, because the perception is that the 800 number means a drone,” Burke says.

In the case of Merrill, brokers refer clients with less than $100,000 in assets or particularly uncomplicated accounts under $250,000 to the center. Brokers have the option to take back accounts at any time, and they continue to earn full commissions on activities undertaken at the call center. Clients with $50,000 or more at the center work with a team of seven and clients with $20,000 receive twice-a-year portfolio reviews. The brokers at the centers are paid a salary with a bonus that's divided into thirds, based on production, customer service skills and net new money brought in.

Different Strokes for Different Folks

“Overall, the service is not the same,” says one Merrill broker. “The good thing is that [clients] call FAC and talk to a live registered person 24/7. The good thing for us is that we can have our client associates spend more time on the clients that need hands-on service and newer high net-worth clients.”

Ultimately, the expectation is that call centers will continue to expand in terms of scope, and that other firms will add them because managements are focused on how profitable each relationship is. That's the logic behind Merrill's segmentation strategy, which involves tiered levels of service for clients according to their net worth. James Gorman, head of Merrill's private client group, has said that in the past, smaller clients were being over-served and yet not properly prioritized.

In creating the call centers, Merrill was also anticipating the move to a more consultative relationship between broker and client. So, while a $50,000 client may not have been much trouble when he/she was generating a few commissions, providing detailed planning advice and periodic reviews to small clients would strangle broker productivity.

Now, the question is whether small investors are getting good enough service to stick with the big firms.

“How well firms manage call centers will determine ultimately what the industry looks like,” says Stephen Winks, a Richmond, Va.-based consultant. “Ninety percent of investors don't have $100,000, and that's the threshold for fee-based advice.”

The payoff for firms is this: They get to keep their toes in the water of Main Street by offering to move accounts over once they reach a particular threshold, though not all accounts are automatically transferred to a regular broker. And there's still the possibility for the referral from these clients of larger accounts as well, while regular brokers can spend more time on advice for larger accounts. “Often, call center people will be more effective in gathering more assets from that client, because there's more time to prioritize them,” says Chip Roame, managing partner at Tiberon Strategic Advisors in Tiberon, Calif.

Indeed, at Merrill, call center brokers have an incentive to bring in more assets. That has raised some concerns among branch brokers who have taken back clients that, they say, were overburdened with phone calls from the call center.

“Some people have begged us to the point where we'll take some piker back,” says one rep. “They'd be better off at A.G. Edwards.”

While Merrill says it's delighted with the performance of the call-center strategy, brokers do still worry about the risks. They say customers with uncomplicated issues are bound to figure out that they can have the same service for less at a discount broker. And smaller clients with bigger ambitions may be turned off by getting the watered-down version of what big clients get, while paying similar fees. Those clients could be lost to smaller regional brokerages or to financial planners.

Ultimately, however, call centers are likely to keep expanding in order to meet the needs of people looking for advice rather than a simple stock trade. Eventually, Wall Street's only connection to Main Street could be an 800 number.

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