From the October 2011 issue of Research Magazine • Subscribe!

September 29, 2011

Krawcheck Out in BofA Reorg

Bank of America said in early September that wealth-management head Sallie Krawcheck was leaving the company as part of a major reorganization of the bank and its operations. It also announced plans to cut some 30,000 jobs over the next several years and $5 billion a year by 2014, though it says it continues to hire financial advisors.

On September 6, BofA CEO Brian Moynihan went public with plans to reorganize the bank’s management and operating units around its three core customer groups: individuals, companies and institutional investors. He appointed David Darnell and Tom Montag to the new posts of co-chief operating officers and made them immediately accountable for all operations. Darnell is now in charge of the “individual customer” track, including the 16,240-strong Merrill Lynch advisor force, Merrill Edge advisors and reps with U.S. Trust.

Roughly two years ago, Bank of America selected Krawcheck, a veteran of both Sanford Bernstein and Citigroup, as the head of its global wealth and investment management group, which had just come to include Merrill Lynch. “I am pleased with the work the team has done, in particular the strong performance of the business,” Krawcheck said in a statement. “It has been an honor to lead Bank of America Global Wealth and Investment Management during a challenging time.”

Time to Streamline

“Sallie has led the wealth management businesses through an important integration with the broader franchise,” said Moynihan. “Delayering and simplifying at the scale in which we operate requires difficult decisions.”

Given the need for further streamlining of staff and management at BofA, “Moynihan is doing the right thing,” said Chip Roame, head of the consultancy Tiburon Strategic Advisors in a phone interview. “The super focus on clients and the other associated changes are all good things.”

BofA had to do more delayering in order to boost profits, Roame says. “This means making it smaller throughout the organization — not just at the lower levels but at higher levels, where it’s top heavy, too,” he explained. “And Moynihan really made this organization have some clean lines.”

Darnell joined BofA as a credit analyst in 1979 and most recently has served as head of Global Commercial Banking. He also led the Middle Market Banking Group and the bank’s consumer and commercial banking operations in the central region of the U.S., based in St. Louis.

“Bank of America’s Project New BAC is key to the company’s strategy of focusing all of its resources on serving individuals, companies, and institutional investors,” BofA explained in a recent statement. “The first result of New BAC was the recently announced management reorganization, removing a layer of management and streamlining the company by aligning its businesses with the customer groups.”

“As the decisions are implemented, employment levels in the areas under review during Phase I are expected to be reduced by approximately 30,000 jobs over the next few years,” BofA added. “The company expects that attrition and the elimination of appropriate unfilled roles will be a significant part of the anticipated decrease in jobs.”

BofA says it expects the first stage of its cost-cutting efforts to “lead to net expense reductions of $5 billion per year by 2014, on a baseline of $27 billion in annual expenses for the areas the company reviewed.”

Krawcheck’s dismissal, says analyst Nancy Bush of SNL Financial, appears to be a circumstance that was tied to the loss of the job within BofA itself, rather than any specific shortfall in her performance. “The reporting structure changed, and that position was folded into the new organization under Darnell,” Bush explained. “At the same time, it gave BofA the chance to move someone out who was in a high-earning position.”

Wealth Management

Meanwhile, the number of Merrill Lynch advisors has been rising. It totaled 16,241 in the second quarter of 2010, up from 15,299 last year and 15,695 in the first quarter. Sales (or fees and commissions) per advisor on a trailing-12-month basis totaled $894,000 in Q2 vs. $843,000 last year and $931,000 in Q1.

In late August, Merrill hired 38 Merrill Edge advisors serving mass-affluent clients in and around Washington, D.C., Baltimore and Philadelphia. The hiring is part of BofA-Merrill’s plan to nearly double the number of Financial Solutions Advisors to 1,000-plus by year-end.

“This is not a clamp down on wealth management,” said Bush. “It’s aimed at the branch network and the loans, credit cards and other products that go with this network.”

BofA has added some 200,000 employees over the past five years through six acquisitions, Bush explains. “This is the first time in two decades that the company has stopped, looked around and decided that it doesn’t need all this. I really believe it’s a rationalization that primarily focused on the branches. They are reassuring [investors] that they will continue to add financial advisors as part of [improving the] potential of the wealth-management group.”

Some recruiters, however, are expressing concerns that the negative news surrounding BofA could hurt its “thundering herd” of advisors. “Many Merrill advisors we speak with are acknowledging that they may need to leave soon,” said Mindy Diamond of Diamond Consultants in a phone interview.  “Advisors were surprised by her departure and are now really concerned. It’s been a tumultuous time for them … and with so much going on, it reminds them of 2008.”

In late August, for instance, three Merrill advisors moved to UBS, which is now led by former Merrill executive Bob McCann. The advisors have combined yearly production of $2.85 million and $450 million in assets under management, according to UBS.

Over the past year and half, some Merrill advisors have been complaining about the hierarchy and other aspects of the firm’s bank culture, the tremendous volatility of BofA stock (BAC) and issues surrounding Countrywide, the troubled mortgage firm it bought in 2008, says Diamond, who does recruiting for rival Morgan Stanley and other clients.

In late August, the bank sold about half its interest in a Chinese financial organization for $8.3 billion, and Berkshire Hathaway, led by Warren Buffett, invested some $5 billion in BofA.

“I’ve heard for a while, that the bank mandates are not meshing well with the entrepreneurial spirit of the advisors and their desire to offer the best service possible to clients,” she explained. “Now, they’ll be reporting to bankers everywhere they look, and bankers aren’t known to get the advisor mentality …. They are concerned that [Krawcheck’s] departure comes on the heels of other developments that have a negative impact on advisors.”

In late April, Krawcheck tapped John Thiel, who was in charge of the private bank and investment group for Merrill at the time, to lead the “thundering herd.” Thiel joined Merrill as an advisor in Tampa, Fla., in 1989.

“John Thiel is very highly regarded by advisors,” said Mark Elzweig of the executive-search consultancy Elzweig & Co in an interview. “As a general rule, most advisors are primarily focused on their own practices and take changes in senior management at 20,000 feet above them in stride.”

 Changes to compensation, such as moving from a traditional broker fee-and-commission plan to a salary-and-bonus configuration would “be a death knell,” Diamond adds. But Darnell has told his fellow executives that there will be no changes to compensation plans, according to a company spokesperson, and he is said to be keenly aware of the talk on the Street (including rumors) about advisor pay.

For some big producers, says Diamond, “January 2012 is a significant inflection point … when they will receive the last part of their retention bonus,” and that could be a time when some will consider leaving more seriously. “They are white knuckling it at present,” she added.

Advisors are used to management changes, explains compensation consultant Andy Tasnady. “There’s ample other management and senior staff in place below Krawcheck,” he shared in an interview, noting that the attitude of the new leader will be the crucial determinant in how Merrill’s “thundering herd” responds to the BofA reorganization.

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