Merrill's McCann Speaks Out on FAs, A.G. Edwards and Rule 202

By Janet Levaux

August 01, 2007 at 04:00 AM

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What is that status of Merrill Lynch's private client group?If you take a long-term perspective, the business was restructured and repositioned between 2001 and 2003. Much more discipline was put into the business — in how we make investments available to clients, what investments we make and how we run the business. Outside the United States, we became a smaller business, more of a higher-net-worth business. Inside the United States, we started to exhibit much more operating discipline in an attempt to get more revenue to the bottom line.

Between 2004 and 2006, there was a period of business optimization. We really fine-tuned the discipline that we have in running and approaching the business. You could best see that in our full-year results for 2006.

Starting in 2007 and going forward, we feel quite strongly that wealth management at Merrill Lynch is a growth business. And while we may have the largest business of this kind in the world — 16,000 financial advisors and $12 billion in revenue last year — we actually think we can grow this business considerably from here, both in and outside the United States.

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Peak PerformanceMerrill Lynch's global private client unit occupies the top industry position:o 16,200 FAs as of June 29, 2007; 15,930 FAs as of March 31, 2007;o 2,504 new FAs added between Q3'03 and Q4'06o $3.3 billion in net revenues (Q2'07); $3.1 billion (Q1'07)o $1 billion in pre-tax earnings, including investment management sales (Q2'07); $842 million (Q1'07)o 27.9% pretax profit margin, including investment management (Q2'07); 24.7% (Q1'07)

Source: Company reports

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How are industry changes affecting Merrill Lynch?The industry is going through a period of consolidation, and Wachovia's [planned] acquisition of A.G. Edwards really just confirms what we have been seeing all along. Recently, Merrill Lynch acquired Advest; UBS acquired Piper Jaffray and McDonald and Company.

What this says is that size and scale do matter in this business. Consolidation continues to happen. The regional model — the small- to mid-size firm — is going to have a very, very challenging time of surviving, let alone thriving, in the future.

We at Merrill Lynch are better positioned than anybody, because we have the scale, the platform in terms of products and account offerings, the technology, the resources and reach, so we can grow our business considerably from here. And we are positioned to do that.

What will it take to succeed going forward?To thrive in this business today and in the future, size, scale and the other things I've talked about are important. Why they are important is that this is an expensive business to be in. To win in this business today, you have to have, for example, technology. It takes the kind of significant and sustained profitability that Merrill Lynch has to have the wherewithal to invest back into your business.

Two years ago, we put the state-of-the-art desktop on our financial advisors' desks. It is a sales tool, but it is also an analytical tool that allows our advisors to be more efficient, effective and profitable in front of their clients.

We currently have out in the field a new telephone system; we have a new client-contact system that we've partnered with Salesforce.com on. What this allows our FAs to do is to pick up the phone and know which client is calling, and what's up on their screen will be a view of the client's account and, in another part of the screen, will be information with respect to all recent meetings that they or members of their FA team have had with the client recently. It allows you to avoid the "I'll get back to you after I check" kind of conversation of the wealth management of the past and move into wealth management of the future.

Because of our investment in technology, we have a relationship through our FAs to our clients that allows us to instantly begin to solve their problems as they pick up the phone. This technology is one of the most significant differentiators between what Merrill Lynch has to offer to FAs and clients and any of our competitors.

As for our investment platform, we recently rolled out the Merrill Lynch Personal Advisor. It's a non-discretionary investment advisory program in which the FA provides ongoing advice consistent with the client's investment objective, target asset allocation and other investment guidelines. It makes the FA more effective with the client.

How is retention going for Merrill Lynch?For the full-year 2006 and in the first quarter of 2007, our turnover of financial advisors — and in particular our turnover of our first- and second-quintile financial advisors — were at historically low levels.

The most important and valuable financial advisor that I could recruit today is somebody that already works at Merrill Lynch. If I can keep the talented people here — people who know the company, know the product offerings, know the platform, have client relationships and assets here — if I can keep them engaged by re-recruiting them everyday by how I lead and by how we invest in the business and the tools we put at their disposal, whether it be technology or product or whatever it is, then they're more efficient and effective than anybody I could recruit from the competition.

Do you know that 81 percent of the revenues generated by our financial advisors come from advisors who began their careers at Merrill Lynch and are at Merrill Lynch today? Creating the right culture and the right platform, how my team and I lead, and re-recruiting existing Merrill Lynch advisors are critical to our success. And we're doing a better job at it than we ever had.

Why is that? It's because the platform does make sense for the advisors. We support the advisors. Private client is 35 percent of the revenues of Merrill Lynch. We have relevance within our own company. In our very roots as a company, we've always been in the private-client business, and we always will be. It has significance as being both the biggest in the industry and being a significant part of our company.

The advisors generating 81 percent of our [private-client] revenues have been with us an average of 11 years. And our top 25 producers have been with our company about 25 years on average. So people build long careers here as advisors.

Our brand is iconic. Not to sound arrogant, but we have one of the best brands in the world, and I think the finest brand in financial services.

We have a commitment to open architecture. We pay our advisors the same, whether they sell a Merrill Lynch-manufactured product or a third-party product.

Scale and profitability are very important. We have a very entrepreneurial atmosphere that empowers our advisors. There was a time when the persona of Merrill Lynch was that we all wore white shirts, blue suits and red ties, and there was the Merrill way or no way. We actually give a great deal of freedom with guidelines, which is the way I'd put it, or freedom with guardrails. But the guardrails are not close together, and there's plenty of room for our financial advisors to do business in the way that they hope to.

Can you share more details about your FA headcount?We will have more than 16,000 advisors in the organization [as of the end of the second quarter]. Retention is critical.

We still have a training program. We hire, develop and train advisors from the ground up. We have no intention of changing that. Many of our competitors have dropped their training programs. Their training program is trying to recruit from Merrill Lynch and other firms.

We're the only firm that's grown our financial-advisor headcount by organic and inorganic means since 2003.

You don't have great retention numbers and great recruiting numbers without having a world-class platform and a culture that FAs find supportive. The philosophy that I try and drive in the organization, if I have to boil it down, is that I feel my management team and I are in business together with our financial advisors. It is a partnership.

Can you share more details on your training program?We commit significant financial resources to, not just hiring, but training and developing Merrill Lynch financial advisors. We fund the practice-management group … that works with advisors in helping them to develop their teams, by developing both their individual and team capabilities. It works on new business development, goal setting, tracking and accountability within teams.

How about specific recruiting efforts that might target A.G. Edwards' advisors, for instance?We just want to recruit good financial advisors. If I had to over simplify it, I would say there are two groups of advisors that we look to recruit.

We are very happy and always interested in the advisor who has around five years of experience and is doing between $300,000 and $500,000 in production at a firm that doesn't have the capabilities and the wherewithal, or the assets and resources, that Merrill Lynch has.

The second group of advisors that we're happy to recruit is the $1 million to $2 million or $2 million-plus producer.They're doing $2 million. But they think they can do $3 million, and Merrill Lynch is the place to do it.

As for A.G. Edwards [and Wachovia], let me say that … Merrill Lynch is a securities firm that offers banking, not a bank that's doing brokerage. That's a very important distinction … Wachovia, acquiring A.G. Edwards, is a bank that does brokerage.

We are in the securities business; banking and lending-type products are offered, but they aren't the business that we're in. That's going to appeal and resonate very well with the A.G. Edwards' financial advisors who are out there. I fully expect to be active in recruiting over the next 18 months.

The consolidation in the industry is creating a dynamic that's very positive for Merrill Lynch. We at Merrill Lynch had a great deal of respect for the A.G. Edwards' culture. It's an old culture. Our culture is more than 90 years old. A.G. Edwards has been in business a long time, as well. Now all of sudden you look around, and if you're an A.G. Edwards advisor, the world's different. Whatever reasons you had to work at A. G. Edwards no longer exist.

It's only natural that when you're in an industry or company that's consolidating and changing, it's a logical time to take stock of where you are and where you want to be for the rest of your career. And Merrill Lynch is going to be a very attractive alternative. We know it's an attractive place for the people who are here already.

We are going to have a high profile, like we've had for the past few years. But you're going to see us stepping it up from here in terms of our ability and our willingness to talk to quality professionals and financial advisors about coming to Merrill Lynch to work.

Can you describe your private-client AUM?We have $1.6 trillion in client assets. Accounts with under $100,000 are four percent, or $65 billion. From accounts with between $100,000 and $10 million in assets, there is about $970 billion, representing 60 percent of our assets. In the high-net-worth space, accounts with $10 million and above represent about $575 billion, or 36 percent, of our assets.

This is a backdrop. We have a lot of different-size client relationships and different service models … But we have significant assets in all of the different client segments.

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A Growing Market for FAsAccording to the 11th annual World Wealth Report issued by Merrill Lynch and Capgemini:o The wealth of the world's high-net-worth individuals (or HNWI), with $1 million or more in investable assets, grew 11.4% to $37.2 trillion in 2006.o The number of HNWIs increased 8.3% to 9.5 million.o The number of ultra-high-net-worth individuals (Ultra-HNWIs), with $30 million or more in investable assets, expanded 11.3% percent to 94,970.

Source: Merrill Lynch, Capgemini

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How about Rule 202 and the much-disputed future of fee-based brokerage work?We continue to work actively independently and through SIFMA, the Securities Industry and Financial Markets Association, to try and have fee-based business survive. We are happy to engage with our regulators, the SEC, on what should be best practices today to have it continue to survive.

It really comes down to choice: We think there are benefits to certain clients with fee-based brokerage work. Some people like the price certainty that comes with a fee rather than a commission. Some people are very active traders, and this is a way for them to save money. And there are also a wide array of services that we offer in our Merrill Lynch Unlimited Advantage Account that are not typically available in advisory accounts, like cash management, banking services, margin lending and things like that.

The bottom line is that Merrill Lynch will continue to be thoughtful, informed and hopefully dispassionate defenders of fee-based brokerage work. I believe there are more than one billion fee-based brokerage accounts in the U.S., and they have nearly $300 billion in assets. At Merrill Lynch, we opened 60,000 accounts last year.

Why should take this choice away from investors? Choice is almost always a good thing. We are carefully and thoughtfully regulated, and we'll see if there is a better way to go about fee-based brokerage … we're actively engaged as a company and through SIFMA, working with regulators and members of Congress to try and hopefully establish this. We'll see what happens.

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Janet Levaux is the managing editor of Research; reach her at [email protected].

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