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Mergers: A Tech Nightmare for Advisors

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No one presumes that, with the merger of two great big financial services firms, technology integration will be headache-free. But would you believe: A nightmare? Scary? Painful? Agonizing? 

Indeed, that’s how a broad spectrum of industry participants, in interviews with Research, described such complicated conversions.

Mergers and acquisitions have been woven into the industry’s fabric since the 1800s. But during the last few years, they have sharply increased. With government pressure, the financial crisis brought some of the biggest yet: Morgan Stanley’s buying of Citigroup’s Smith Barney, Bank of America’s takeover of Merrill Lynch and Wells Fargo’s purchase of Wachovia.

Technology integration is a highly complex affair, involving hundreds of different systems—thousands if the merged firm is multinational. At best, conversions are difficult to manage. But if riddled with snafus, they will impact financial advisors’ productivity and lead to reduced revenue and compensation—together with plummeting client satisfaction and departures. What goes up are operational risk, reputational risk and costs to firms. Net-net: profitability suffers.

Every integration has unique challenges, but nowadays the challenges seem more plentiful than ever.

“It’s become a very, very complex environment and not getting any easier. It’s a nightmare. You have to be concerned with the provision of services, risk management, compliance, regulatory oversight and, if the conversion is international, a whole set of dimensions for each country,” says Colin Clark, president of Cloud Event Processing, a Minneapolis-based infrastructure provider with clients including the New York Stock Exchange and Nasdaq.

A pivotal issue: At the start of an acquisition, companies typically pay scant attention to tech integration.

“Firms tend to take the systems decisions too lightly. But what seems like ‘just the back office’ has consequences all the way to the business side and profitability. Deciding what systems to go with needs a lot more time than is typically dedicated to it,” says Alois Pirker, research director, Aite Group, a financial services research and advisory firm based in Boston.

Conversion is a massive enough job when one firm’s technology is chosen over others’. It is a herculean task when a whole new platform is created. That’s what occurred when Smith Barney became part of Morgan Stanley in 2009.

Boasting 17,000 FAs, the merger marked the largest advisor integration in history. Smith Barney’s brokerage platform wasn’t included in the deal; so the choice was to use either Morgan Stanley’s existing system or design a new one. Senior management opted to start from scratch.

The Smith Barney platform was extremely functional. However, it was based on outmoded mainframe technology; Morgan Stanley, focused on the future, created a new system that was state-of-the-art Web based.

But in the months during and following conversion last summer, the platform, dubbed 3-D, started to give heartburn to many of the firm’s FAs—notably those who had come from Smith Barney. Complaints ranged from glitches, delays and therefore decreased production all the way to loss of clients. Exasperated advisors charged that the system was neither fully tested nor adequately explained.

“A period of adjustment” is what Morgan Stanley Wealth Management’s David Lessing, managing director-chief operating officer for U.S. wealth management, called the situation in a September interview with Research. Pirker sums it up this way: “Creating a new system is a little bit fraught. They had their work cut out.”

But Morgan Stanley’s conversion woes are by no means unique.

“It’s a systemic issue within the industry. We come across it on a regular basis,” says David Furlonger, a vice president and fellowship holder at Gartner, a technology consulting and research firm.

“And when the system doesn’t do what you imagined it would do or what it was intended to do,” Furlonger says, “there are a number of areas where it hurts not just you as a firm but your clients.”

Indeed, bumpy conversions can lead to operational risk. “Even if the [overall] system is working, if it’s unfamiliar to users, some will create different ways of working,” Furlonger, based in Vancouver, Canada, points out. “That could have operational risk and security implications because what they’re doing isn’t necessarily reflective of policy.”

The firm that is now Wells Fargo Advisors has undergone 15 conversions in the past 15 years alone. Major acquisitions that would lead to the current institution stretch back even earlier, including J.C. Wheat & Co.’s combining with First Securities to create Wheat First Securities in 1971 and a 1988 merger with Butcher & Singer to form Wheat First Butcher Singer.

Joe Nadreau, Wells Fargo Advisors managing director, strategic solutions group, has been with the company for the past 10 mergers and led the integrations of A.G. Edwards (2007) and then Wachovia Securities into Wells Fargo (2008), the latter triggered by federal intervention during the financial crisis.

“Because we’ve done so many integrations, we have a very formalized methodology,” says Nadreau, based in St. Louis. “A lot of the success comes down to the first 100 days after the deal is announced, when you set up a [precise] time frame, create policy, and then build technology around the policies to support them.” A target operating model (TOM) forms the foundation of all systems’ selection.

“There are always risks that come with integration,” Nadreau says, “but the goal is to create the least amount of change for both clients and advisors. We try to make [FAs] aware of what the platform will be and conduct extensive training. They shouldn’t find out at the point of integration what the system can or can’t do.”

Morgan Stanley Smith Barney (which changed its name to Morgan Stanley Wealth Management in late September) mounted what Lessing calls “the largest training program in the history of corporate mergers,” with 450 trainers in branches for four weeks before and four weeks after the conversion. Despite that, many FAs soon began to grouse about the system. 

“The transition has been more than difficult—it’s impossible,” one million-dollar producer formerly with Smith Barney told Research last July. “I don’t think a broker got involved in reviewing this. Production is down 30% firm-wide. People are losing accounts. We were given retention bonuses so we wouldn’t leave. But now I’m paying for staying with this company. It’s very, very stressful.”

Claims of client and advisor attrition as well as a drop in production by nearly a third linked to the new platform are “exaggerated,” says James Wiggins, head of Morgan Stanley corporate communications, adding, “we’ve seen no dip in revenues that can be tied directly to technology.”

Among the FAs who exited before the conversion, Walter Urban, ex-Smith Barney, went independent with Alpha Capital Partners, in Mount Laurel, N.J., affiliating with Raymond James Financial Services. Technology wasn’t a chief reason for his leaving the wirehouse, but the timing was: He wanted to spare clients a double conversion.

Now Urban says: “We certainly didn’t know all the nuances of the new platform other than that it was being sold as incorporating the best features of Smith Barney’s and Morgan Stanley’s technology. Some of my former co-workers say that the new system is anything but user-friendly, and no one is pleased with it.”

Lessing maintains: “There is no denying that integrations cause disruptions, and we’ve tried our best to minimize that. We wanted to do everything we could to bridge the gap. There are areas where the functionality is not what people would want it to be, and we’re focused on these very heavily. [But] given the magnitude of the deal, we knew we’d have very significant challenges in completing the integration.

“We also knew,” Lessing says, “that very soon after conversion, we’d be able to make upgrades. We’ve done that [in September] and will do more in November and December. We’ll be able to very quickly address issues that come up. Many situations fall into the bucket of fixes; many others fall into the bucket of enhancements.”

Bank of America’s acquisition of Merrill Lynch was totally different technology integration-wise—not just because this was a bank buying a brokerage but because no new system was needed: the firm went with Merrill’s platform, far superior to that used by BofA brokers, whose advisory business was tiny in comparison. 

According to Pirker, the bank brokerage was essentially “dismantled and switched off.” Those advisors remaining with the firm to become Merrill FAs were pleased with the advanced workstation and other high tech capabilities they gained. Where there were gaps, Merrill built additions to conform to what BofA advisors had before.

Still, the integration likely wasn’t a stroll in the park.

“I imagine that it would be a delicate, intricate operation because they’re global, and the systems have to be treated with kid gloves,” Clark says.

The main challenge, according to Scott Logan, managing director and head of global wealth and investment management business technology for Bank of America-Merrill Lynch, was maintaining the integrity of data in transitioning bank brokerage clients to Merrill. In particular, the firm had to ensure there were no mix-ups concerning those with accounts at both BofA and Merrill.

“If you put the wrong [two] people together, you’ve got a privacy incident, and that’s your worst possible scenario,” says Logan, based in Pennington, N.J.

 Bank of America also shifted clearing activities from National Financial Services to Merrill’s internal clearing system.

“There were so many [clients], and it was very complex. I wouldn’t want to do one of those every year,” Logan remarks.

 Training is of course imperative when it comes to managing a conversion. Though Morgan Stanley conducted a great deal of it, one problem was that “the trainers weren’t familiar with the legacy systems and had a tough time relating the new system to real-life stuff. They didn’t know the day-to-day problems of advisors,” says recruiter Danny Sarch, president of Leitner Sarch Consultants, based in White Plains, N.Y.

Contrary to conjecture by some MSSB FAs, a group of advisors worked with the firm’s technology council “to guide the development of the system,” Lessing says. Also, 150 focus groups were held in the branches. And a survey on features collected input from thousands of FAs.

 “But from our conversion and every other one I’ve seen, no matter how much input you have, you won’t get everything right,” Lessing says. “I anticipated that there would be significant noise driven by the degree of difference between the new system and what Smith Barney advisors were used to. We were expecting that in many cases, people would have challenges they had to work through.”

Similar in certain technical respects to Morgan Stanley’s technology scenario, was Wachovia’s A.E. Edwards conversion. Though Edwards’ technology “had some capabilities that were better than what we had,” Nadreau says, the Wachovia system prevailed. “We lost those Edwards’ capabilities but did our best to fill important gaps” by building additions.

When Swiss bank UBS expanded into the U.S. via acquisition of PaineWebber in 2000, “the depth of financial support to enhance our technology enabled us to leapfrog,” says UBS Financial Services’ Peter Weintraub, senior vice president-investments and partner in the firm’s Demsky Weintraub Weath Management Group, in Beverly Hills, Calif. He joined PaineWebber in 1976.

“PaineWebber didn’t have the financial capacity to implement a lot of new technology. They did it on the basis of what they could afford, when they could afford it,” says Weintraub.

Pirker contends that UBS technology is now lagging somewhat because no further dollars are available for improvements. “UBS’s profit is wafer-thin. If they go to Switzerland to ask for more funds to invest in technology, they’ll say, ‘We already invested in that business. We don’t necessarily want to throw even more money into it.’”

Lessons Learned

One of the biggest mistakes in integrating technology, Nadreau says, is to maintain a virtually duplicate legacy process following a conversion. Such skeletons in the closet, “just prolong the agony. You need uniformity. The right answer is to choose a single operating model and systems that support the policies, and move on.”

He adds: “Still, we’ve learned through trial and error over 15 acquisitions and made some of the same mistakes people made in the recent past.” For example, when Wachovia bought Prudential Securities in 2003, “we had systems issues, including outages, right out of the gate.”

It’s best to complete a conversion in one single move, Nadreau advises. “When we’ve done them as separate events, it’s almost like prolonging the pain.” With Wells Fargo’s purchase of Wachovia, for example, “we did the conversion in 13 or 14 different events, based on geography…. It was difficult for the advisors.”

To avoid being plagued with conversion troubles, management needs to be candid and communicative at the start of an acquisition, says Clark at Cloud Event Processing. “Firms should start talking about integration as part of due diligence and [actually] begin on it even before the merger announcement. [Some] do, but brokers probably would not be aware because it’s kept quiet. People are afraid of being open.”

Furlonger makes a similar point: “There’s a disconnect between the business side and the technology side that needs to be addressed.”

Nadreau emphasizes: “You need to inform everyone about the decisions you’ve made and why, and prepare them for the change. Be honest and upfront in setting expectations for advisors…. A different system will always cause anxiety, but it shouldn’t be that they didn’t understand what was happening to them.”

Early on, he advises, “realize that you’re not going to please everybody and that you need to be prepared to deal with the fallout. There’s always fear on the part of advisors. It’s a very scary time.”

 At Morgan Stanley, many FAs still have little awareness that embedded in their new system is a slew of innovative features. “There’s a bucket of things that are better about the platform. But the right time to talk about them isn’t now,” Lessing says. “First we’ll correct what’s perceived to need fixing. Then, as we settle the platform down, we’ll talk about our new tools to help drive better client relationships. We’re addressing the issues we were expecting, but we still have a lot of work to do.”

Pirker gives the 3-D design a good rating, though he says that Morgan Stanley “has to get the kinks ironed out and make sure they can bring it into production-level quality—hopefully, quickly.”

 Lessing is “heartened knowing that we have the ability to make rapid changes, that advisor and client attrition haven’t spiked and that it typically takes at least a year before people admit a new platform is better than the old one,” he says.

Adds Wiggins: “Idiots didn’t design our platform.” But if the firm could do it all over again, “we probably would have managed financial advisor expectations better.”


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