Sallie Krawcheck, president of Global Wealth and Investment Management at Bank of America, is on a mission to debunk what she says are “myths” about the wealth management industry.
The myths, Krawcheck says, are that wealth management firms are losing advisors to independent firms; clients are leaving wealth management firms in “droves”; investment performance is all that matters to clients; that wealth management firms set product quota goals for their advisors; and younger investors are more risk tolerant than their elders.
In comments at the Investment Company Institute (ICI) annual conference in Washington on May 5, Krawcheck said that last year Merrill Lynch, with its approximately 15,500 advisors, only lost 36 advisors to independent firms, while it hired 25 advisors from the independent ranks.
“Last year we didn’t lose thousands of advisors to the independents, we didn’t lose hundreds; we lost 36, and we hired 25, so [that’s] a net loss of 11,” Krawcheck said. “And on client flows from those losses and hires, we were positive.” In fact, Krawcheck (left) said, “our FA attrition rate today is near record lows.”
The number of financial advisors at Merrill Lynch now stands at 15,695 compared with 15,511 in Q4 2010 and 15,178 in Q1 2010. Financial-advisor yearly production, or fees and commissions, rose to $931,000 per advisor in the first quarter from $913,000 in the previous period.
Another popular notion, she says, is that clients are leaving full-service wealth management firms in droves. “At Merrill Lynch, the client attrition rate is in the low single digits, a level that most firms would publish as a point of pride,” Krawcheck said.
In the first quarter of 2011, Merrill Lynch profits stood at $531 million, up 68.6% quarter-over-quarter and up 22.4% year-over-year. Revenues totaled $3.54 billion compared with $2.99 billion a year ago, for a gain of 18.5%. Quarter-over-quarter revenues were 3.3% higher from Q4 2010’s $3.43 billion.
Merrill Lynch client balances stood at $1.55 trillion versus $1.45 trillion in Q1 2010, 6.9% higher. Average assets under management (AUM) per advisor were $99 million in Q1 2011 versus $98 million in the fourth quarter of 2010 and $95.5 million in the first quarter of 2010.
Krawcheck said that yet another myth was that wealth management firms set product quotas and goals for their advisors to “cross-sell” products—a term Krawcheck said she “despises.” On the contrary, she said, “Merrill Lynch and its peers are reducing the number of proprietary products they sell.”
Another myth is that wealth management advisors only interact with their clients on a short-term, transactional basis. Merrill Lynch's advisors’ relationships with clients, Krawcheck said, “have endured, on average, 13 years, and one in four client relationships is 20-plus years in duration.”
It’s also untrue that pricing pressures in the wealth management business are “crushing,” Krawcheck said. “The ROA for Merrill Lynch has been flat for the past 15 years; that’s right, flat. In fact, Merrill Lynch and the historic brokerage industry have moved from being brokers to investment managers to wealth managers in a way that, by their continuing to add value, has fully offset any inherent pricing pressure–let me say that again: that has fully offset any inherent pricing pressure.”
While investment performance matters to clients, Krawcheck said, feedback that BofA-Merrill Lynch received on its recent “listening tour,” revealed that “solving problems, not delivering some number of basis points above the index, matters most of all” to clients. Investment performance ranked “about 7th” on the list of things that are important to clients about their relationship with their advisor.
Younger investors are not more risk tolerant than their elders, according to Krawcheck. “The age cohort 25 to 35–which has really only known sideways to down markets in their investing lifetimes–are almost as risk averse as the pre-retirement investors,” Krawcheck said.
The Realities Facing Wealth Management
After attempting to bust the myths about wealth management, Krawcheck said that the wealth management industry must be ready to tackle the “realities” it faces.
Reality Number One: “Tomorrow’s client will look very different, and the industry is not prepared.” There is an “increasing disparity–in fact, a quite glaring disparity–between current and prospective clients and the advisors who serve them,” she said.
While more than eight of 10 advisors today are male, and their average client is a 63-year-old white man, Krawcheck continued, “many people are surprised to learn that women hold more than half the nation’s wealth, comprise more than half of the workforce, are increasingly entrepreneurial, and women are also outliving men by an average of five to seven years.”
Women, she said, “tell us they do not feel well-served by the wealth management industry, and that the relationship with the advisor is typically with the husband, which is why, when the husband dies, and the assets go to the wife, the typical advisor keeps those assets only 46% of the time.”
Reality Number Two: Performance is important, but safety and a real financial plan matter most.
“This may change somewhat as markets (we hope) continue to do well, but clients today tell us that they are far more concerned with preserving capital and avoiding losses, rather than maximizing returns,” Krawcheck said.
Reality Number Three: Trust–in an advisor, an organization, and the markets–is paramount.
“Investors have told us that their confidence was shaken not only by the market downturn and by the large losses in their portfolios, but also by the failure of major financial institutions, by the executive bonuses, and by the fallout from the Bernie Madoff scandal,” Krawcheck said. “Despite all of that, and contrary to public perception, clients continue to trust their advisors. They’ve been to the depths and endured and survived the worst together, and today their bonds appear to be stronger than ever.”
Krawcheck also noted BofA Merrill Lynch’s support of a fiduciary standard of care for clients. “The differences between financial advisors at brokerage firms and registered investment advisers (RIAs) is confusing for investors,” she said, “and thanks to years of negative advertising about which service model is superior, more muddy than ever before.” Getting a universal fiduciary duty “right is one of the most important things we can do as we seek to strengthen our capital markets and earn back the trust of a wary investing public.”