Square Peg in a Round Hole

Will The Real Ms. Krawcheck Please Stand Up?

The quotes from around town:

“This is a crucial year for the bank,” said Alois Pirker, a senior research analyst at Aite Group LLC. “Merrill Lynch is turning around and the dust is settling from the financial crisis. The top retail bank in the country is working with the top retail broker…” “…If they don’t have success cross-selling services, people will start calling for a breakup of the merger,” he said. – via Investment News 5/8/11

“Sallie Krawcheck has a really tough job,” Degenhardt-Burke says. “The hardest, I think, of anyone on Wall Street. The BofA & Merrill cultures just don’t mesh well.” [Bloomberg Businessweek] – via Dealbreaker: Write-offs 3/3/11

This is just the reality of the situation. But you have to hand it to her, she really is trying to make this work & she even looks good doing it.

Yesterday’s lede in AdvisorOne:

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.

Yep, she’s trying to portray a position of strength about the franchised offering of Bank of America / Merrill Lynch. Like a true leader should. I’m just not sure I agree with what she’s saying.

“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.”

Here’s the thing: That might be definitionally true– (although I’d love to see what ‘the independents’ means & see the three year trend). Here’s what I see (and not exclusively at Merrill). The really big money teams (1bill+) are going independent. (And LOVING it) And ALL of the $100-200+ million dollar teams are a bonus check away from the door– & looking at regional firms. Most will move when they can, in about 5-10 years. The reason attrition is so low {right now} is because almost everyone is locked in with bonuses from the merger or they’re a recent recruit. No, Ms. Krawcheck?

Here’s the reality:

There is more pressure at some branches than at others, according to Ron Edde, an executive recruiter in California.

“But the No. 1 complaint I get from Merrill brokers is that they’re being pushed to sell banking products,” he said.

Here’s the rub.

In your world Ms. Krawcheck, as your customer– my broker will offer me “preferred” pricing on some of your lending services. This will be mostly on home mortgages & personal lending (the biggest profit centers for the bank), I’ll get less preferential treatment with your margin lending on my portfolio because now the money is captive. If I was truly mobile with my money, your rate would arguably be cheaper, because you’d be that much more hungry for my business. But in any case, the paperwork is so onerous with all of the disclosures & forms you need me to sign (because of all of the self-dealing being disavowed during the process) at some point I wilt to your will & your subsequently less financially innovative approach. And the 4 other mega-banks are exactly the same.

Anything easier would literally not be legal (that’s spelled out on page 156 of your monthly statement).

Then, while you have my money- through my “trusted” Advisor I’ll basically be offered a menu of third party products & services to select from (with or without the “direct advice” my advisor skirting the legal definition with disclaimers). And all of this will be done to give me the appearance of arm’s length dealing, all the while, those products I’m investing in are using the brokerage firms’ institutional services (the real profit center for your bank anyway).

And my advisor is now, of course, wise to the whole game– because this last epic downturn showed everyone the absolute stinking stench of stenchiness we’ve created.

Where’s the innovation in that? 

Me? Personally I like competition. You know why? It gives a chance to a new way of thinking. I want financial innovation to benefit me, and my neighbor. And I’m not seeing it enough. You want to see something revolutionary? Look at Kickstarter. Crowdsourcing good ideas. Transparently. Competitively. Capitalism not only works, it rocks.

I also don’t think people realize the quantum shift in banking that occurred with Mint.com.

Mint has literally boxed the banks into your phone– relegating the banks to nothing more than big dumb boxes of data, track all of your spending with a single login. I can mind my AMEX & Nordstrom Visa spending, because nobody beats their service, I can mind my monthly bills being paid out of my Schwab account, because they pay better interest than the bank or Wirehouse firms, I can track my mortgage, oh AND those investment advisory fees…I can see those too. My money can be at almost any bank, and I can see it wherever I am. That’s revolutionary.

Look people, if we are going to ask for a brighter future, let’s at least be clear about what it should be. Banks are not the boogyman. They aren’t inherently evil even. And big banks even make sense in the international arena, no question. But when you tie institutional interests & banking interests to individuals?… You got all your eggs in one basket.

Bankers make money selling you products. No ifs, ands, or buts. It will never change. Some products will be good, some will not. You except this. You expect this. You might like it, or hate it. But that’s the way it is. Like any market for goods and services– banking is in our societies’ DNA.

Advisors? I don’t think I need to explain what they do. Or maybe I do. An advisor should protect you. They should get the best price for the best product for you, because we take advice from people who are smart about money. It’s that simple. They should, of course, be unbiased & transparent about their advice.

In general it’s about Trust with a capital T. Right? It’s #1 on every poll.

And yet, we keep trusting these same people telling us the same thing. Banking + Investing + Insurance + Lending + Advice + in the same place = a good thing. But I bet those mega-financial advisor teams slinging multi-million dollar life insurance policies to their best clients would think twice about it — if they had to tell their client, the commissions they are about to receive — oh sure, it’s all legal & suitable’ now, but imagine if their fiduciary duty forced them to disclose it. Oh, mama.

Did you know in California a life insurance broker can rebate their commission? Probably not. Why would you? The big brokers would never do that. But that’s because you keep going through the same door, doing the same thing– but you keep expecting it to be different.

You assume you’re getting a good deal because that’s what everyone is doing, because we all trust Behemoth Bank. Economies of scale? That only works when there is true competition.

And Ms. Krawcheck has to know this too. It would be a very different world with true competition in banking & advice, believe me. It would be very different if advice and products were truly separate.

But until the investment banks are separated from the individual’s ear about what to do with the money in their pockets, we are doomed to roam a wasteland of mediocrity & more uninspiring financial reform shenanigans.

Band-aid after band-aid. We’ll never get it right, until we get the basic foundation right. I know like with a lot of issues we face today, it’s complicated. But this really would make sense– break ’em up. If they were smart they’d do it on their own, and fast. It’s like AT&T up in there. Remember when we broke up AT&T? Stagnation, no service, monopoly pricing. Today? iPhones, Nokias, & Droids. Who woulda thunk it?

Not Ms. Krawcheck:

“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.”

Want to know what that means? Right now, they’re squeezing the brokers. Oops, I mean Advisors. Expecting them to do more, for less- like everyone else. But at some point that efficiency stops. And here’s the thing– at some point the horse trading brokers between firms will stop- we’re probably close to that point now. And then there isn’t a ton more value to squeeze without layoffs OR getting customers, like me, into more of their products. That’s it. That’s the strategy. She knows it. Now you do too.

But until you give the rest of us (the individual investor) a fighting chance at real advice about what’s real & what’s profitable– we’re hyperbolically doomed I tell you. She has to know this too. So, what’s it going to be Ms. Krawcheck: myths or reality?

Sources:

Grumbling herd complains about cross-selling – Investment News

BofA’s Krawcheck Busts Wealth Management ‘Myths,’ Warns About Realities – AdvisorOne

The Bull Whisperer– Businessweek

Sallie Krawcheck– Dealbreaker