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Training for Volatility

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When the Chinese stock market crashed in August, plunging 11% in one week and taking the world’s markets on its turbulent downward ride, Merrill Lynch Wealth Management senior advisor David Leland and junior advisor Chris Menard expected to field many calls from clients worried about how the volatility might hurt their portfolios.

But what the two advisors got was silence: few client calls came in. So Leland and Menard were the ones to pick up the phone instead. They called clients to check in with them and review their goals-based wealth plans, which focus on the big picture of financial planning, long-term investment horizons and portfolio diversification.

“I didn’t think it would be like the old days of 1987 or 2008, but I thought there would be more calls about making trades. I was shocked how much different the business is from what I expected, because of goals-based wealth management,” said Menard, a 25-year-old certified financial planner in Merrill’s Bank Team Financial Advisor program.

Menard is one of four trainees with the Leland Group, a 12-employee Merrill advisory practice in Beverly, Massachusetts, headed by David Leland, who is 60. After working alongside the senior advisor in the mornings, Menard reports to his full-time job at a Bank of America branch in nearby Salem where he is a financial solutions advisor for online brokerage Merrill Edge. Then in the afternoons, Menard returns to the Leland Group for more advisor training in the afternoon.

Goals, Not Picks

For his part, Leland has seen vast changes in the advisory industry since he earned his CFP designation in 1987. During a joint phone interview with Menard this September, Leland said Merrill’s new goals-based wealth management model has largely replaced the old commission-based, stock-picking model that would shake up clients and spark heavy call volumes to brokers during periods of market volatility.

“We don’t have people calling up panicking to know what next month’s returns will be,” Leland said. “The amount of phone calls we received this summer has changed dramatically. We have had next to no calls in the last six weeks. In 1987, I had to tell people, ‘I will talk to you in five minutes,’ and I went from call to call to call day and night. I’ll never forget it.”

Traditionally, wirehouses such as Merrill have only supported solo advisory practices, many of which fail within a few years, according to Mark Elzweig, president of Mark Elzweig Co., a New York-based recruiting firm in the asset management space. In the 1990s, for example, three years after a group of new recruits would come on board at a wirehouse, only 15% or so would succeed in the business, Elzweig said.

“They needed people who were impervious to rejection. Now, the public is skeptical about brokerage houses, so that’s made it more difficult for new people to get established. To mitigate that, firms seek career-changers with some experience and maturity,” Elzweig said, noting that with increased suspicion of Wall Street post-2008, wirehouse clients are more likely to find financial advisors via referrals from friends, family or bank branches.

For many large advisory firms, the answer to client retention is intergenerational advisor teaming, whether to address periods of volatility or to keep hold of assets over the long haul. As financial advice for high-net-worth clients becomes more sophisticated, teams can better handle complex planning needs and investment products, adopt ever-changing technologies and keep up with regulatory requirements.

“The appeal of advisor teaming has grown among both established and new advisors,” says Kenton Shirk, associate director at financial-services research firm Cerulli Associates, in the second-quarter 2015 issue of The Cerulli Edge. “For advisors, a successful merger can generate substantial growth and productivity enhancements.”

The number of professional staff members per practice averages 3.3 in the wirehouse channel, while the growth of multi-advisor practices is most pronounced in independent channels, Cerulli has found. Dually registered practices employ an average of 5.2 staffers and registered investment advisors employ an average of 4.5.

No Experience Needed

Merrill Lynch’s careers website promotes its Practice Management Development program as a place where entrepreneurial-minded advisor candidates can learn about the business while receiving a base salary plus “an uncapped, unlimited annual income opportunity.”

The firm says recruits don’t need a financial services background, and that some of the most successful advisors came from careers as salespeople, attorneys, accountants, military personnel, professional athletes, or insurance or real estate agents. In addition, Merrill hires recruits directly from college CFP programs.

Critics, however, say the training program at BofA Merrill Lynch is designed merely as an asset-gathering tool for the firm, where other advisors can grab assets and clients that recruits have gathered prior to getting fired for not meeting aggressive production hurdles.

But according to Racquel Oden, head of advisor strategy and development for Merrill Lynch, who is responsible for the coaching and development of the firm’s 14,000 advisors, employee retention, teamwork and goals-based wealth management are the firm’s focus. Oden leads the firm’s new advisor development programs, including the Practice Management Development (PMD) initiative as well as Team Financial Advisor (TFA) and Banking Center Financial Advisor (BFA, of which Chris Menard is a part).

“Where clients, millennials and the industry are now, we’ve defined three ways to enter our business,” Oden said. “We have no preference which path you enter. We’re agnostic. We have no targets of which program should have certain numbers. It really allows the individual to pick the program that’s best for them.”

Merrill has approximately 3,300 trainees and hires about 1,500 advisors every year. In 2014, 500 PMD advisors graduated from the program, Oden said. Success rates are not yet available for the TFA and BFA programs because they are 24-month programs that started in August 2014. Oden did say that the industry average for most training programs is 25%, while Merrill is now tracking at 40% retained.

Rookie, Meet Millennial

To be sure, it’s harder for new advisors to go directly into production mode at the start of a career, “especially if they face a sink-or-swim expectation,” says Cerulli in its second-quarter report. Yet the advisory industry has shifted to a fee-based model where skills beyond salesmanship are required, the report points out.

“Beyond asset gathering and investment performance monitoring, clients require advice on a broad spectrum of issues,” according to Cerulli. “Rookies, in particular, can establish a rapport with [millennial] investors, approaching this cohort from a similar vantage point, and brandishing technology and social media. Some advisory practices pair the rookie and senior advisor together in client meetings to convey the legitimacy of the rookie as a support advisor.”

A case in point is the partnership of Tom Brady, 55, senior vice president-investments of the Brady Wealth Management Group of Wells Fargo Advisors, and Paul Waller, 32, an associate financial advisor with a master’s in business administration who met Brady in 2009 while working in Wells’ St. Louis home office on the “Envision” goals-based retirement planning software desk. In 2014, Waller joined Brady’s practice in the wealthy St. Louis suburb of Frontenac and now participates in Wells’ Associate Financial Advisor (AFA) program as he works toward a CFP designation.

“To be a financial advisor in the old way of training, the probability of success was lower than getting through Navy Seal training. I started when I was 41, and I have a strong biography and education, but it was very hard, and I had to do it on my own,” Brady said. “It’s so much more enlightened now. The firm’s intention with the AFA program is to give young advisors a better chance to be successful by working as an apprentice with a senior advisor.”

By the time Waller came on board, Brady had built his business and was taking on new HNW clients to the point where the complexity of his practice required additional staff. Adding Waller plus a third staff member not only allowed Brady to better manage his time, but it opened the door to a succession plan. (Cerulli anticipates that mergers of established advisors and the pairing of junior and senior advisors will accelerate in coming years.)

“I’m 55 and I intend to work 10 to 15 more years. But that said, having a younger person on the team offers the potential for a continuity of service for both my clients and their children,” Brady said during a joint phone interview with Waller on a September afternoon just before Waller was to conduct an initial client meeting with the Millennial-age nephew of one of Brady’s clients.

“Since Tom brought me in, this is like an apprenticeship,” Waller said. “Tom has really exposed me to all of his clients and has let me participate in 98% of all the meetings. The first year has me integrating into the business, and clients are getting more comfortable with me.”

Lifeboat Drills

The first year also has the senior and junior advisor managing volatility. One of the advantages of Envision’s goals-based software is that it offers Monte Carlo simulations that help clients put volatility into perspective, Brady and Waller say.

“We recognize that in the three years before 2015, we experienced below-average volatility in the market, so we anticipated the greater likelihood of future volatility and we conducted ‘lifeboat drills’ prior to 2015. We shared the historical data with clients and educated them about reversion to the mean and how periods of low volatility can be followed by higher volatility,” Brady said.

Wells Fargo Advisors’ Devin DeStefano, managing director of next-generation advisor strategy, confirmed that the AFA program is an apprenticeship program and decidedly not a mentorship program. “Based on what we’ve seen internally, mentorship is softer and driven by the mentee and may equate to a more sporadic ‘we meet every Friday and you ask me questions.’ With an apprenticeship, it’s a formalized relationship between a senior advisor and an associate advisor,” DeStefano said.

Wells’ compensation model has three phases. In year one, the apprentice earns a base salary, year two is a combination of salary plus revenue sharing with the senior advisor, and in year three the salary starts to dissipate with the expectation that it will be replaced by a more traditional compensation model of commissions and fees.

Don’t Mind the Crash

Training for volatility involves structured programs that pair senior and junior advisors, Oden said, adding that Merrill’s goal is to measure client assets on progress to goals. “Advisors can tell clients, ‘While the Chinese stock market is crashing, we have a retirement goal for you that’s still on track,’” Oden said.

For Chris Menard, on Aug. 24 when the Dow Jones Industrial Average dropped 1,000 points at the market open due to China’s economic slowdown, he attended the Leland Group team meeting and was glad to hear David Leland’s thoughts on the turbulence he had weathered in 1987, 2000 and 2008.

“I have a lot of qualifications, licensing and training at Merrill Lynch, but I don’t have all the experience that David and other advisors have,” Menard said. “He saw the similarities and the differences and gave me a lot of talking points with clients I was reaching out to. When I was talking to people that day, they knew David and our whole team, and the call wasn’t just from a 25-year-old.”


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