Can Sallie Krawcheck restore Merrill's luster?

Kenneth Lewis, Bank of America Corp.'s em-battled chief executive, gave a trenchant analysis of the state of banking — and the brokerage business, in particular— last week when he announced that former Smith Barney boss Sallie Krawcheck will run the bank's global wealth and investment management sector. “Changes in the structure and requirements of the financial services industry are causing us to re-engineer businesses,” he said in a statement detailing Ms. Krawcheck's arrival and other management shifts. “Customer behavior is evolving, requiring new products, services and delivery methods.” Mr. Lewis, whose credibility has come under sharp attack as a result of buying Merrill Lynch & Co. Inc. in January without disclosing its rapidly escalating, multibillion-dollar credit-related losses, offered no public prescription for Ms. Krawcheck to follow. It's fair to say, however, that her job — which includes running New York-based Merrill's shrinking brokerage franchise — will not be easy. Last year, the market share of adviser-managed assets held by wirehouses slipped to 47.7%, from 48.5% in 2007, according to a report released last week by Boston-based consultant Cerulli Associates Inc. At the same time, market share for independent advisers grew to 32.8%, from 31.6%. Ms. Krawcheck, 44, is smart and charming — and, according to Mr. Lewis, who is 62, she's one of a handful of Bank of America and Merrill executives competing to succeed him “at the appropriate time.”
But on top of the challenges any outsider faces in reassuring and motivating a new crop of nervous direct reports and their employees, she and all wirehouse executives have major structural and market issues with which to contend. That is a formidable challenge given the fact that Merrill's top retail executive, Dan Sontag, submitted his resignation last week. The market turmoil that's battered investment portfolios over the past two years has shaken confidence broadly in the value of advice and made particularly vulnerable the loyalty of high-net-worth investors who Merrill and its competitors have pitched so incessantly in recent years. The recent rebound in equities may have quelled the impulse to shoot the messenger, but uncertainty about the economy continues to haunt investors and hinder financial advisers' asset-gathering efforts. All wealth managers, including those at regional and independent broker-dealers, as well as independent advisers, face the same client trust issues, of course. However, the wirehouse sales model, with preferred and in-house managed-product platforms, interest-enhanced “specials” to lure new investors, and marketing support and rewards for specific services that enhance a firm's or its parent's income statement, seems particularly vulnerable to challenge these days. The Obama administration's attempt to impose a fiduciary standard on the sale of financial products, replacing the current requirement that brokers simply ensure that a product is “suitable,” has the potential to overturn large broker-dealers' sales and marketing infrastructures. That's a monumental challenge for Ms. Krawcheck and other wirehouse executives. In addition to her Merrill portfolio, she oversees Bank of America Corp.'s U.S. Trust Corp. private-banking businesses and its $33 billion Columbia Management asset management unit. (It has been rumored that Columbia is expected to be sold within the next few months.) That means another of Ms. Krawcheck's challenges is to cross-market more effectively the firm's banking, brokerage and asset management services — a goal that bankers have been pursuing with little progress for decades. In its second-quarter regulatory filing with the Securities and Ex-change Commission, Charlotte, N.C.-based BofA flaunted its progress in integrating Merrill by saying that consumer bankers had referred about 6,500 “affluent banking-only clients” in the previous six weeks, yielding about 1,400 new Merrill investment clients. To some ob-servers, that's small potatoes for the biggest U.S. bank by assets, as is the filing's boast that Merrill advisers referred “more than 1,100 clients” to BofA's commercial bank. Another challenge for Ms. Krawcheck and other wirehouse executives — and rumors persist that UBS AG of Zurich, Switzerland, is searching for a new leader of its U.S. brokerage network — is reputational and largely beyond their control to fix. Major trading losses and credit-related shenanigans that battered the companies in late 2007 and 2008, and triggered the worldwide financial services crisis, have infected the standing of the firms' retail-brokerage and wealth management franchises. “It's very stressful when your company is always in the headlines,” said Charles Niemes, a 21-year veteran of Merrill in Novi, Mich. He produced more than $3 million last year but left last fall to join St. Petersburg, Fla.-based Raymond James & Associates Inc. “Clients ask how they can trust you to run their finances when your firm can't manage itself,” Mr. Niemes said. Ms. Krawcheck, a former securities analyst at Sanford C. Bernstein & Co. LLC (and later president of the firm, now owned by AllianceBernstein LP), has plenty of experience dealing with reputational issues. Until last December, she ran Citigroup Inc.'s wealth management businesses and previously did a stint as chief financial officer of that troubled company. How she'll inspire her Merrill troops and stem the involuntary outflow of clients and brokers will be closely watched. Sanford C. Bernstein, AllianceBernstein, Citigroup and Smith Barney are all based in New York. Merrill's reputation as the world's largest brokerage army has been eclipsed by New York-based Morgan Stanley, which this year formed a majority-owned joint venture with Smith Barney that gives it about 18,445 advisers around the world and total client assets of $1.4 trillion. Merrill at the end of June had about $1.2 trillion of client assets and 13,000 legacy financial advisers (excluding about 2,000 BofA brokers who had adopted the Merrill brand), down from almost 16,100 six months earlier. Although the firm, like its wirehouse competitors, says it has been weeding out low producers, the exodus is notable, according to analysts and recruiters. Representatives at Merrill and BofA did not respond to requests to interview Ms. Krawcheck for this story. Time, of course, will heal some of the reputational problems and, if investment portfolios continue to repair themselves, some of the financial ones. It's also foolish to predestine her attempts to manage the firm to failure or to relegate big retail-brokerage houses to the dustbins of history. Indeed, some observers said, new behemoths such as Merrill/Bank of America, Wells Fargo & Co./Wa-chovia Corp. and Morgan Stanley Smith Barney are formidable, even if the combinations were made out of weakness. “In turbulent periods, the investing public tends to look for safe havens, and the larger the firm, the safer the haven,” said Rick Peterson, a recruiter who has an eponymous Houston firm. “The large-brokerage-firm model may have been hurt over the past two years, but it is not broken at all.” E-mail Jed Horowitz at jhorowitz@investmentnews.com.