Editor’s note: When I interviewed Matt McGinness, principal of Best Practice Research a few weeks ago, he talked about how RIA custodians need to rush before 'wirehouses get back on their feet’. Since then I’ve been keeping an eye out for whether that process has already begun to occur. Certainly Sallie Krawcheck’s comments in recent interviews would have you believe that the process is well underway. But is it true?
Sallie Krawcheck is the top executive overseeing Merrill Lynch for the Bank of America but sometimes it seems like she is transitioning into PR.
She is criss-crossing the country to pump up the troops in brokerage branches and paying homage to old executives.
Krawcheck is also giving interviews to CNBC and, most recently, InvestmentNews, all with one basic message: Everything is fine [and rapidly improving] at Merrill Lynch.
There is probably much to be learned from her comments but when I read one of these Krawcheck interviews, I don’t always know what she means.
What she says and what my sources — not to mention the industry data — tell me about Merrill Lynch differ so much that I find it confusing.
For help I reached out to industry insiders and asked them to help me to put Krawcheck’s comments into context. Here is what I found:
1.) Question: What did Krawcheck mean when she made this remark to CNBC?
“I do think there are some really interesting opportunities in the investor space, the wealth management space, and the individual investor space, and so I am taking some time to look at some initiatives or opportunities there,” she says.
To me these vague remarks have the ring of ones being made by the CEO of a large bank who is just being made aware of the wealth management business as a means of bolstering revenues for a larger core business. As leader of one of the biggest wealth management companies in the world, wouldn’t Krawcheck want to do more than “take a look at some initiatives or opportiunities there”?
One former Merrill Lynch executive explains that Krawcheck may see herself as the CEO-in-waiting of a larger corporation.
“She has never expected to be part of a wealth management business as a long-term career position,” he says. “That was not her position at Citi and it’s not her position at Bank of America.
He adds: “Merrill is now the third-largest [wirehouse] and it doesn’t matter as much” on the larger wealth management playing field.
2.) Is it wise for Krawcheck to portray Merrill Lynch like a company sitting in the catbird seat at a time when it seems wirehouses are losing so many assets to RIAs at custodians like TD Ameritrade and Schwab Advisor Services?
For instance, she says this about Merrill Lynch’s monumental challenge of trying to convert its sales force into an elite team of fiduciaries. “It won’t require wholesale changes in our business,” she tells InvestmentNews in the interview it published last week. Krawcheck suggests it mostlyrequires more paperwork and technology.
This is what the board of directors at Bank of America [which owns Merrill Lynch] want to hear and it behooves her not to raise alarms if she wants to ascend to the postion of CEO of the bank, a former wirehouse executive says.
“She’s not going to make any mistakes that are going to take her out of the running” as a chief at Bank of America, he says.
The executive explained that Krawcheck’s chances of drawing a top job at Bank of America are very good. The positions of chairman, CEO and president likely all need to be filled in coming months.
The board of directors of the Bank of America seems to like her considering that they handpicked Krawcheck [and the former CEO, Ken Lewis merely signed off on her.] The wildcard here is that the Lewis’ decision to retire took the board by surprise and it’s hard to say whether the board would be inclined to promote Krawcheck so rapidly.
3.) Who is Sallie Krawcheck trying to reach when she says, for instance, that Merrill Lynch doesn’t need truly open architecture: “I think the company is doing a terrific job of offering an impressive range of investment options,” she says in an InvestmentNews article. “I don’t think we have to focus on bringing in the 3,761st mutual fund.”
“There are limits to what she can do,” a former Merrill Lynch executive says. “She’s supposed to be the figurehead and give [Merrill Lynch] direction. She’s preaching to that audience [to brokers who did not receive retention bonuses] but other than moral suasion, what does she have?”
Merrill’s head count already dropped to about 15,000 brokers, he adds. Several thousand of them of were paid retention bonuses that totaled perhaps $3 billion. So that leaves a few thousand advisors who weren’t worth paying bonuses to retain but who are worth trying to keep, an executive says. That’s who she’s speaking to.
4.) Don’t the enormous resources of Merrill Lynch put Krawcheck in a position to build an incomparable infrastructure around her wealth managers?
“They say they’re going to spend $500 million but they’re laying people off” in the branches who provide technical support,” the executive says. “She does not have enormous tools in terms of money or a stable management team that she can trust.”
5.) In her InvestmentNews interview Krawcheck explains what she means when she says that her company is bringing aboard a large number of financial advisors by saying this:
“The new financial advisors are trainees,” she says. “Merrill has a very long and successful history of growing their own. It’s been a strength and a very important part of the Merrill Lynch culture.”
Is it really a strength for Merrill Lynch that most of its new advisors are trainees?
“She can hire green people and she can recruit on the margins,” the executive says. “At best you bring on 500 advisors and lose 300 advisors.”
6.) In her InvestmentNews interview, Krawcheck suggests that a time may be coming when Merrill Lynch could win back advisors lost to the independent channel.
“I think the common wisdom [that many advisors are seeking independence] is dated,” she says. “Clients are looking for firms with financial strength and broader capabilities to better navigate the next period of turbulence. What we’re seeing now is independent advisers asking how they can join us because they’re hearing how much we’re investing in the business.”
The executive says this comment is misleading because “the evidence”: [see pg.72] points to headcount losses [down to 14,979 brokers as of Sept. 30 from 15,822 brokers at the end of March] for Merrill Lynch.
Barnaby Grist, senior managing director of strategic business development for Schwab Advisor Services, says he is mystified by statements like Krawcheck’s others like hers that he hears in the industry.
“I hear people say: the move to independence isn’t happening,” he says. “It’s hard to understand that. It’s amazing. You wonder about the quality of their research.”
Cerulli Associates of Boston reports that wirehouses will experience net losses of $188 billion during the next few years, according to a press release issued by Schwab on Friday.
The same research company reports that the four largest broker dealers had a combined $5.4 trillion of assets and 48.5% market share for advisor managed assets in 2007.
The assets for those big four brokers dropped $1.5 trillion to $3.9 trillion in 2008 and their market share fell to 47.7%. Cerulli reports that in the same time period, market share for independent firms grew to 32.8% from 31.6%, according to the Schwab release.