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Financial Planning > Behavioral Finance

Listening to Two Clients

By Alexei Bayer

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You would think that Delmonico’s Steakhouse, a landmark New York establishment around the corner from the New York Stock Exchange, would be a perfect place to take a Merrill Lynch senior executive out to lunch.

Delmonico’s, which claims to be the first fine dining establishment in the United States, opened its doors in 1827, back when John Quincy Adams was President. It has been at its current location since 1891, and its distinctive Gilded Age building has been recently restored to its original architectural splendor. And Merrill Lynch, of course, sits atop the private client financial advisory heap, with 15,000 reps worldwide.

But Steve Bodurtha, who manages the Wealth Management, Investment Products & Insurance Group at Merrill, looks skeptical at the comparison. It is the establishment part he doesn’t like.

“It is my sense that this industry is undergoing great change,” he says at the start, before we even have had a chance to look at the menu. “It is going to look quite different five or 10 years from now. It is important to be setting the pace of change.”

It is an exciting time to be in the industry, and a very challenging time too. It is certainly not the time to rest on one’s laurels and to keep doing business the same old way.

There is, of course, the demographic shift. The past 20 or 30 years have been a period of vast asset accumulation, and investment firms like Merrill Lynch have been called upon to respond, to help clients build up capital. Now, as baby boomers move into their mature years, the emphasis is more on the financial planning, on making sure they don’t outlive their wealth.

But not on the financial planning of the past, says Bodurtha. The nature of retirement is changing. People may be retiring earlier, but they may not want to stay retired.

“They may retire for a brief period, but then go back to work in a different industry, or maybe consult. They may have multiple rounds of retirement, before, that is, they ultimately retire.”

This kind of lifestyle change calls for far more complex financial advice than anything seen previously. Whereas in the past a financial advisor would come up with some asset-allocation model, like the proverbial 60-30-10 percent for stocks, bonds and cash because it has worked for other clients in similar situations, now an FA is more likely to make a detailed projection of the client’s cash-flow needs, and show how a particular asset allocation will impact their finances, allow them to meet financial obligations and still have enough money to enjoy life.

“This industry,” says Bodurtha, “has always been proficient in taking ideas and theories developed for institutional money management and applying them to individual financial planning — such as various ideas from academia that came after modern portfolio theory was developed.”

There is both demand for greater sophistication from financial advisors and intense competition for the client’s dollar making sure that the clients get what they want.

“There are many more choices available to clients,” admits Bodurtha. “Those who ignore this do so at their peril.”

It is an environment where reps have to adapt to a new role as mentors to their clients, not salespersons. But it also augurs a sea change in the way Bodurtha approaches his job in product development.

“In the past, whenever clients’ needs changed, the response in the industry has been — ‘OK, let’s come up with a new product.’ New products are still important, but there is also a need to use existing products efficiently.”

The variety and sophistication of investment products appearing on the marketplace has increased in recent years, but, surprisingly, what the clients need is less for somebody to help them navigate the complexities of financial engineering than to listen to their particular problems and to come up with right solutions.

In the past, says Bodurtha, products were dominated by what he calls a “push model,” helping advisors sell products to clients more efficiently. Now, new tools help FAs better understand clients’ needs within the universe of available products.

For example, in the old days, investment proposals were in a way captive to individual product groups. Now, they go across the entire universe of products — or disciplines, as they are called at Merrill.

This explains the popularity of cheaper, more flexible and efficient products such as ETFs or HOLDRs, Merrill’s exchange-traded sector portfolios — especially in wrap accounts where the fee for providing advice is separate from the cost of the product.

Bodurtha sees his job actually becoming two separate ones. First, it is to keep improving Merrill’s traditional products. But there is also a new component — to make sure that when an FA sits down with a client and has that conversation, the FA has the right tools at his or her disposal to enhance and broaden this conversation.

“It is like a day job and a night job. Except it’s hard to know which is which,” he jokes.

But good FAs come in all shapes and forms. There is no set paradigm of how to serve clients best, and a variety of what Bodurtha calls successful FA models exist in the marketplace. This calls for greater flexibility in serving the FAs. To achieve it, Merrill has created an advisory board in different product lines as a critical link between Bodurtha’s development department and the FAs.

“You can never go wrong by listening carefully to what your client’s needs are,” says Bodurtha. But his two jobs, in a way, serve two clients. You have to understand what the FAs need, but to do that you also need to know — and even anticipate — what their end-clients will want.

This seems just fine for Bodurtha. At first glance, he looks professorial and in fact talks about trends in the financial industry as a highly articulate intellectual. While at the Harvard Business School in the early 1980s, he was attracted to an academic career and lingered on for an extra year after graduating. But the hands-on, practical dimension eventually prevailed. So much so that he was featured in a book by Alan Rubenfeld, The Super Traders: Secrets and Successes of Wall Street’s Best and Brightest.

“I had a somewhat atypical childhood for a Fairfield County kid,” says Bodurtha, who grew up in Connecticut. “My father had a New England farming background and we were never allowed to buy anything. We always had to make it ourselves.”

Perhaps for somebody whose job it is to design products, Delmonico’s is the right place after all. It is credited with inventing dishes such as Lobster Newberg, Oysters Rockefeller, Eggs Benedict, Baked Alaska and the world-famous Delmonico’s Steak.

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Who: Stephen G. Bodurtha, Head of the Wealth Management, Investment Products & Insurance Group, Merrill Lynch

Where: Delmonico’s Steakhouse, New York City, August 11, 2006

On The Menu: Prime Rib, Baked Alaska and product solutions

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Alexei Bayer runs KAFAN FX Information Services, an economic consulting firm in New York; reach him at [email protected].

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