Mother Merrill's Extreme Makeover

On the list of least respected professions, stockbroker once ranked down there with used-car salesman, but if Nestor Vicknair's experience is any indication, things are looking up for financial professionals.

A 12-year veteran of Merrill Lynch, Vicknair has noticed a pronounced improvement over the years in the way clients perceive him and his colleagues.

&#8221Clients now show you the kind of professional courtesy that you saw with doctors or lawyers,” Vicknair says. “That wasn't present 10 years ago.”

In Vicknair's case, there's good reason for the status upgrade. He is a member of Merrill Lynch's Circle of Excellence and a CIMA designee, and he and his co-workers have increased their emphasis on professional education and on approaching clients in a more holistic manner. In short, he and his firm have transformed themselves from stock jockeys to wealth managers. Clients have noticed the change and applaud it.

“Clients don't go to their brokers saying, ‘Can you manage my money?’ They say, ‘How can you help me send my kid to college?’” says Russ Alan Prince, of Prince & Assoc., a financial services industry researcher. “It's all about solving a [financial] problem.”

Of course, Merrill is not alone in approaching clients this way. Much of the brokerage industry has been scrambling to acquire a wealth management bent, in no small part because such a focus positions firms to better compete for elite clients.

Indeed, research supports the notion that wealth management is an effective approach to generating new business in the financial advisory business. A 2004 study from CEG Worldwide shows that wealth managers — those advisors with deep knowledge of their clients — got, on average, 7.9 referrals a year from those customers, compared to 1.6 referrals a year from advisors with more shallow knowledge of clients.

From Smith Barney, which is hiring estate attorneys in each of its regions, to the gaggles of advisors from other firms flocking to classes for advanced degrees like the CIMA (classes booked through 2005), wealth management is obviously an industrywide trend.

Front and Center

But Merrill is the poster child for the institutionalized wealth management movement. Look behind the headlines of Merrill's cost-cutting — the trimming of the district-director ranks to 10 from more than 30, the reduction of the brokerage workforce by more than 7,000 since 2001 — and you will find a company that has completely reorganized itself to reflect a commitment to the wealth management process.

Though Merrill is well known for its continual org-chart tweaking, this corporate reorganization is different, say sources familiar with it. Merrill intends to completely rewire its corporate culture to emphasize advice-driven services over product hawking.

To ensure the metamorphosis reaches the rank-and-file, the firm is tearing out the product-orientated infrastructure, in effect “de-siloizing.” Instead of maintaining product departments organized around individual families of products, such as mutual funds, Merrill's distribution efforts have been combined under one executive and manufacturing under another. The idea is to force employees to think about financial solutions rather than about individual products. For example, internal wholesalers are expected to help advisors gather client assets by acting as financial problem solvers — finding whatever solution might be best for the client, rather than focusing narrowly on flogging a particular financial product.

“You can have all the products in the world,” says one large Merrill producer. “But everyone has gone to open architecture, so it becomes a question of who has the best practices — that's how you retain clients, through intangibles.”

Merrill is walking the talk with infrastructure upgrades. It is in the midst of a $1 billion technology project, which includes new broker workstations designed specifically to support the consultative advisory process. The firm has invested in several types of wealth management tools for reps to help shift the focus to a process-oriented approach. In addition, Merrill's recruiting efforts are geared towards outside producers whose businesses include stocks and managed accounts, but also mortgages and other financial assets (see sidebar).

“Historically, the NYSE member firms have not acknowledged high-level council or fiduciary responsibility,” says Stephen Winks, a Richmond, Va.-based consultant and former Wheat First executive. “The industry must move from a product management orientation where the question of suitability is, ‘Who cares as long as I'm making money,’ to a client-focused orientation, where the process is built around the client. Merrill's altering its infrastructure so that eventually advisors will be empowered to add value and fulfill a fiduciary responsibility.”

Burning Down the House

Some would say these types of changes are crucial for brokerage firms' good health. Merrill's estimated market share has been declining, from an estimated 14.2 percent in 1999 to an estimated 11.5 percent in 2003, according to Citigroup's brokerage analyst Ruchi Madan. To be sure, at least some of that decline is due to a substantially reduced sales force. Merrill's brokerage workforce shrank 33 percent to 13,500 from the end of 2000 to the end of 2003.

Over the years, Merrill has shown itself to be an innovator, great at finding new ways to catch the proverbial mouse — the pioneering CMA account, introduced in 1978, being one strong example. More recent introductions include the “Total Merrill” branding program, along with its new credit card and a loan management account, which allows clients to establish lines of credit, term loans and letters of credit. The firm's “Beyond Banking” platform, set up in 2003, includes reimbursements on ATM transactions, another reason why clients would want to think of Merrill as a financial supermarket rather than just a securities broker.

But, sources say, the expansion of product offerings was handled with a “sell-stuff-now” mentality that remained during the waning days of the bear market, when Merrill executives were thinning the sales force and pressure on reps was high. Merrill aggressively pushed mortgage refinancings, bringing in $50 million in revenue in 2002 as a stopgap to falling retail revenues on investments. Similarly, the “Beyond Banking” platform, promoted as the “missing piece” of the puzzle at Merrill, was introduced to reps in late 2002 with a sales contest granting them Visa reward points for opening new accounts. Charles R. Schwab & Co.'s head of strategy, Dan Leemon, drew unfavorable comparisons between Merrill and Smith Barney at a conference in November, saying that Merrill was suffering because of cutbacks in its sales force.

Although Smith Barney has been gaining on Merrill in terms of total U.S. client assets, Merrill has been making strides in the quality of its brokers' books. Merrill broker productivity was $730,000 per rep, according to Citigroup's Madan, strongest in the industry. Profit margins rose to 22 percent in the first quarter, and the firm is growing the sales force again. But what is becoming clear is that simply upping the payout on fee-based business and adding more products doesn't translate to sophisticated approaches to solving client problems. The top reps were pointing the way — and Merrill wanted to duplicate their strengths for the entire sales force, and restructure both the internal workings of the organization, as well as its technological platform, to help advisors.

“Our clients deserve a consistent and uniform process that they run through when they deal with Merrill,” says Bob Mulholland, co-head of the private client group, Americas division. “Some of the tools we have now force you into discussions away from the investment world — it opens up a lot of avenues that we wouldn't have spoken about in the past. Now, we have a platform to back it up, and multiple services that we can surround the client with.”

To complete the transformation, Merrill executives say the firm needed certain structural changes throughout the organization, in technology as well as in how internal wholesalers communicated with financial advisors. To address that, the firm refigured the management structure of the private client group. At the beginning of 2003, it moved H. McIntyre “Mac” Gardner, who had been finance director at Merrill Lynch, to co-head the U.S. private client division with Mulholland, and appointed Nikos Kardassis and Steve Bodurtha under him to handle the distribution and manufacturing divisions, respectively.

“What we've done is separate origination of the product with the specialist that would specifically promote it,” says Mulholland. “The specialists have an eye towards one thing: that they educate, train and promote, but they also can present solutions outside of their area. You're looking at clients in a more holistic manner. There's much more of a benefit to be had by referring other [specialists] to reps, or through partnering of different people.”

Kardassis has been charged with coordinating wholesaling efforts, so instead of competing against each other for the same advisors at their own company, more information is shared among wholesalers. The firm is also using its databases to determine which clients would more likely be interested in specific products, as well as determining which products are more appropriate for certain advisors' businesses. “It's an aggressive connect-the-dots kind of approach,” says an executive from another company, who declined to be identified in print. “The marching orders are to get along.” The executive said while other firms tried this previously, this approach, through a centralized management structure, had a good chance of succeeding. “This is well-structured, but it's too early to pass judgment on it.”

Tools and the Talent

Besides the new workstations being tested, there are a number of new tools that have been incorporated into the wealth management “process” that help simplify setting up asset allocation models and portfolio reviews. “The average FA from New York to L.A. is going to be a lot happier in the field than with what we were using three or four years ago,” says one producer familiar with the forthcoming workstations.

John Dozier, managing director at Merrill Lynch, says the new tools integrate previously disparate areas. “We had a lot of these tools, but they were specific to certain business units, i.e., a retirement planning tool would be specific to the retirement planning business,” says Dozier. “It wasn't integrated.”

What the new workstation tools do is force an advisor to start with planning a strategy for the client rather than focusing on one aspect of the client's life, Dozier says. It starts with a profiling tool called “Assessing Your Goals,” which allows advisors to quantify a client's particular needs. Previously, this sort of thing was done through a $250 “Financial Foundation” report, but AYG doesn't have an additional cost to the client.

“It raises the professionalism of the advisors in general, especially when you have to come up with a report in a few seconds,” says one large producer.

The next steps go through the asset allocation process, part of which will include a soon-to-be-introduced tool called, “Wealth Outlook,” which uses Monte Carlo simulations to determine probabilities of achieving client goals. Another offering is a quarterly portfolio review, something a number of reps, in interviews, were most bullish about. Several large producers interviewed say that, in various degrees, the technology being introduced mirror things they were doing already — buying on the side to upgrade their own business. One, who has seen the demos for the new workstations, says that some of the feeling among reps was “it's about time.”

“The dirty secret is that we were behind everyone else,” he adds. “Now, we're a step or two ahead.”

A Changing Business

There's no doubt that the brokerage business has changed dramatically in the last couple of years. The question for Merrill and others has remained whether the largest brokerage firm in the country, with an ingrained sales culture such as this, can reposition itself to offer “holistic” advice as if it were a small, six-man boutique, instead of the behemoth that it is.

The recent changes — the internal focus on sharing information, data mining and cooperative efforts rather than jockeying for pole position with the pet product — perhaps point the way. “The orientation is in the right direction,” says a fund executive who requested anonymity. “Every firm is going through this transformation.”

So the broker/dealers are focused on raising advisor expertise and creating wealth managers — the more institutional the relationship, the more success with retaining clients. Already, Merrill is doing well here. A September 2003 survey of affluent investors from Citigroup analyst Madan found that clients were less likely to leave Merrill if their advisor left (28 percent) than Smith Barney or UBS (55 percent and 70 percent, respectively).

But any organization with 13,700 people is a mighty big ship to turn — especially when selling was the modus operandi for the company's history. Even if the intent was ultimately to help the client, the solution to catching the mouse was a different kind of cheese. Now, Merrill is rebuilding the entire mousetrap — trying to, anyway.

“If there is a common way of doing things, it makes it a lot more manageable,” says Winks. “Is it common sense? Yes. But it is, and it isn't.”

Merrill Seeking

Wealth Managers

For many years Merrill was called, “The firm that trained the industry.” That's because newly minted reps, fresh out of Merrill's training program, were often lured away by other firms, who preferred to recruit rather than train.

But now it's Merrill on the prowl. Merrill says it plans to increase its sales force by 5 percent for the next three years. That works out to a net gain of 2,700 reps through 2006, bringing the firm's total to about 16,500. But not all advisors need apply. Merrill, seeking to continue its evolution into a wealth management advisory, is seeking veteran financial advisors, the kind who truly understand the concept of total wealth management — defined as the consultative process for helping clients grow, protect, transfer and charitably donate their assets.

And Merrill will pay — for the right person. Merrill is offering bonuses of up to 100 percent for well-established producers with clean records and a diversified business mix. Recruiters say Merrill will go a bit further if need be — and bonuses are offered after 18, 30 and 42 months. Meanwhile, bonuses for branch managers take in a variety of factors, but rank recruiting efforts high in the equation.

Performance bonuses are now triggered by revenue generated to the firm, rather than production. This means that producers are rewarded for certain products that contribute recurring interest and other revenues to the firm (compared with, say, writing a simple stock ticket). “Especially in mortgages and banking products, the revenue to the firm is higher than the production credit that's actually paid,” says Bob Mulholland, co-head of private client, Americas. “What it does is, it provides some incentive for [advisors] to look at other products and services.”
— DAG

Client Assets Rebound

Total Client Assets at Merrill Lynch, 1999-2003

Getting Sticky

Likelihood of clients leaving a firm when their broker departs.