Facts & Resources

Remarks for Investment Company Institute's Annual Meeting (Krawcheck)

Sallie Krawcheck, President of Global Wealth and Investment Management, Bank of America
Thursday, May 5, 2011 3:00 am GMT

May 5, 2011

Washington, D.C. prepared for delivery...

...introduction given by Greg Johnson, chairman/CEO of Franklin Resources...

Thank you, Greg, and good afternoon everyone. It is a privilege to be here to speak before the members of ICI. This organization has built its reputation upon 60 years of continuing service and leadership on behalf of our industry and clients

It's remarkable to witness the trajectory of ICI's growth, beginning with some 68 mutual funds and assets of just over $2.1 billion to ICI's position today as the acknowledged leader of the asset management segment with more than $11.5T in client assets. ICI's growth is a testament to your high standards

It speaks to your thought leadership, and to the quality of ICI's intellectual capital and research, which are considered industry benchmarks. And it highlights ICI's ability to stay on the pulse of leading financial issues. ICI has helped to light the way, both intellectually and programmatically, and I am delighted to salute your leadership.

And it will continue to be we go forward and the industry continues to evolve, we are moving into new realms of regulation and oversight, everything from fiduciary on the one hand, to the proposed KYC specific rule changes on the other.

KYC will require us not only to stay abreast of our clients' goals and objectives, and of their risk tolerance, but also, their time horizons, something that ICI has focused upon for years.

Against that backdrop, I thought it would be informative to share with you today the feedback we're receiving from our wealth management clients...what they tell us their needs are and where they think our business should go.

Specifically, I'm referring to feedback that we received on our recent listening tour, along with data from a wide range of other ongoing research gauging client sentiment. Taken together, it represents the most comprehensive body of information that we have collected in the history of our franchise.

And we all know what it shows, right? Ours is, indeed, a much written-about, talked-about, remarked-upon shortage of pundits telling us what is happening in our business.

And as the pundits keep telling us -- our industry has a host of challenges. It is today defined by the traditional wirehouses losing share, the independents gaining share, by FAs who are leaving to strike it out on their own, by clients leaving if the FAs are not, with relationships that have been frayed by the downturn. These relationships were frayed because of the paramount importance of investment performance, most specifically relative investment performance. That, right after the importance of relative performance for clients, is pricing....and that the industry is defined by pricing pressure, that client relationships are defined by "short-termism" and product quotas, and that while the older clients are leaving, the younger clients remain more risk-tolerant.


Uh, actually, wrong. And not just wrong on one count....wrong on all counts. For example...

Myth: Everyone knows that the large wealth management firms are losing advisors to independent firms.

Fact: At Merrill Lynch, with our 15,500 advisors, last year we didn't lose thousands of advisors to the independents.....we didn't lose hundreds.....we lost 36 ...and we hired a net loss of 11...and on client flows from those losses and hires, we were positive. In fact, our FA attrition rate today is near record lows.

(And, yes, I do recognize what I have done to myself by pointing this out...whenever I had done so in the past, all I need is for one of our 20,000 client-facing professionals to go independent for it to be pointed out in the press that I am wrong on this, and the floodgates are NOW opening.....)

Myth: If the FAs aren't, the clients are leaving full-service wealth management firms in droves.

Fact: At Merrill Lynch, the client attrition rate is in the low single digit percentages, a level that most firms would publish as a point of pride.

Myth: Wealth management firms set product quotas and goals for their advisors to "cross-sell" products (a term I despise...more on that later).

Fact: On the contrary, Merrill Lynch and its peers are reducing the number of proprietary products they sell....heck, we sold our asset management business altogether.... and, yes, we have budgets and 3-year plans but what we measure down to the FA level is client satisfaction, NOT any type of proprietary fund quotas

Myth: Advisors interact with their clients on a short-term, transactional basis.

Fact: Our advisors' relationships with clients have endured, on average, 13 years, and one in four client relationships is 20-plus years in duration.

Myth: Pricing pressures in our business are crushing.

Fact: 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.

Myth: It's all about investment performance.


Yes, investment performance matters enough that clients rank it about 7th on the list of things that are important to them in their FA relationship....client service and responsiveness also matter a lot -- and solving problems (not delivering some number of basis points above the index) matters most of all.

Myth: Younger investors are more risk tolerant than their elders.

Fact: The age cohort 25 -- 35 (which has really only known sideways to down markets in their investing lifetimes) are almost as risk averse as the pre-retirement investors.

So, those are some, although certainly not all, of the most prevalent myths that our research pretty effectively debunks.

But if that's NOT what is going on, then what IS going on? If those aren't the challenges that our industry faces, then what are they? Make no mistake, our industry does face significant challenges, and our industry, in partnership with all of you, is at risk if we don't tackle them. So, let's tick through what we see....

Number one -- Individual investors are worried and need help more than ever, for longer than ever.

Clients today are relieved the markets have rebounded and their portfolios are recovering, but they remain deeply concerned about the future. Like all of us, they're feeling the double whammy of deflation and inflation.


What I mean by that is that people see the value of their real estate, of many of their financial assets and of their compensation remain depressed...even as the costs of retirement, health care and education move relentlessly higher.

So clients lack certainty about their future income and expenses. They see the specter of rising taxes, they fret about inflation potentially eating into their retirement savings, and they worry that their money will not last through their lifetime.

Moreover, a lifetime today is a longer period heralding new financial challenges. For every 65-year-old couple, there is a 50-50 possibility that one will live to the age of 92, and a 25 percent chance that one will live to the age of 97.

Yes, the issue is outliving your assets. Add to this the big unknown of healthcare is easy to envision one major illness virtually wiping out a carefully planned retirement plan. No surprise, then, that our older clients have no confidence that Medicare will offset their medical expenses, or that younger people are skeptical about the long-term solvency of Social Security.

For all of these reasons, clients are rethinking traditional ideas about retirement. More and more are considering the need and desirability of launching "second acts." Clients today are thinking less about golden years and more about golden opportunities -- to conservatively invest in their futures, and in the futures of their families and the next generation.

The one apparent common concern linking all investor groups is the desire to maintain current lifestyles. Toward that end, clients are expressing a need for two important and distinct kinds of financial assistance:

Firstly, they are actively reaching out to advisors for more help and guidance. They want closer collaboration, and they want to include more of their family members in the discussions. Concurrently, they state a desire to do more of their own research and due diligence to build their knowledge and be accountable for their financial outcomes (though, for many, this remains more a stated desire than something they are actually doing).

Secondly, clients are asking that the industry help by providing simplified products and solutions that align with their personal goals. Product complexity bit them before. They're saying, "Please get rid of complexity wherever it exists...that means, speak to me in plain language that I can understand, rather than in jargon that I need a PhD to comprehend."

Number two -- Yes, performance is important, but safety and a real financial plan matter most.

This may change somewhat as markets (we hope) continue to do well...but clients today tell us that they are far more concerned with preserving capital and avoiding losses, rather than maximizing returns.

Throughout our client listening tour, one message was crystal clear: "Keep me safe, keep me safe, keep me safe" -- then, and only then, worry about getting upside potential. One client told me, "Risk is not about standard deviation, it's about risking my standard of living."

They don't articulate it this way, but they implicitly get that our industry (broadly defined) is much more focused on, spends many more dollars on, invests much more thought in looking to capture upside in their portfolios than protecting them on the downside...and for them, this feels upside down.

Instead, they are laser-focused upon setting and reaching their life and financial goals....particularly as they age and they are further back in achieving them and with less time left to do so. They recognize that they need a strategy and a plan, but they are very clear on one point...they feel overwhelmed by the thought of putting one together and so stall in doing so.

Now, we as wealth managers are all for financial plans....heck, it's a core competency of ours....and we go at it with gusto....the full plan, all at once. But, very interestingly, clients will tell you that that is too overwhelming...that they prefer to go slower in phases.

Number three (and this is a biggie) -- Tomorrow's client will look very different, and the industry is not prepared.

Now this is where the real strategic risk to our industry lies, rather than the myths I laid out for you before....

There is an increasing disparity.... in fact, a quite glaring disparity...between current and prospective clients and the advisors who serve them. More than eight of 10 advisors today are male, and their average client is a 63-year-old white man who, over the past decade, has been aging....the average client over that period of time has gotten a handful of months older every year.

At the same time, many people are surprised to learn that women hold more than half the nation's wealth, comprise more than half of the workforce and are increasingly entrepreneurial. In fact, women hold stakes of at least 50 percent in 10 million firms, and companies owned by women account for four of 10 privately held businesses across the country.

Women are also outliving men, by an average of five to seven years, and the typical widow is only 58 years old. As couples of the baby-boom generation move into their 60s, 70s and 80s, more and more women will be left to fend for themselves

For their part, women tell us they do not feel well-served by the wealth management industry, and that the relationship with the advisor is typically with the husband, which is why, when the husband dies, and the assets go to the wife, the typical advisor keeps those assets only 46 percent of the time.

What women are looking for instead is an advisory relationship that is not just about the money but recognizes them as individuals with highly personalized needs, with money more a means to an end.

No newsflash here, but women are more prone to worry about their families, to worry about healthcare, and to worry about their ability to meet their financial goals given all of the uncertainties within the economy...all of which makes them more conservative than men in their investments.

But their longer life-spans and time horizons imply the need to take on greater risk, so there is a real risk of women investing too conservatively to meet their needs.

Another shift of potentially huge consequence for the industry is seen among the Millennial Generation, some 90 million Americans born between 1979 and 1999 who are building their own wealth. They are expected to control some $13.4 trillion by 2030; and, like women, they also differ in terms of their inclinations, priorities, and the ways in which they connect with each other and with their advisors.

And here's what is truly concerning for our industry -- when the wife then dies and leaves the money to the kids, advisors in our industry keep the assets just 2 percent of the, I didn't misspeak....2 percent of the time.

For most of this next generation, let's face it....investing has been a colossal disappointment -- one book-ended by the dot-com crash on one end, and by the market meltdown following the credit crisis on the other...they certainly don't feel like their needs are being met.

Thus, many in their 30s with nothing to show for it, and so, understandably, they are even more conservative and risk-averse than their parents. Their extreme reluctance to embrace investing embodies a conservatism not seen since the Great Depression.

Millennials save more than other groups and are more likely to put their money into lower-yielding savings accounts and lower-yielding investment vehicles. Thus, like women, they risk seeing their savings and earnings diminished significantly by inflation. They are less likely than other groups to work with advisors and investment management firms. Consequently, this is a generation that the wealth management industry hardly knows.

However, believing where there's a will, there's a way -- we see a real possibility that this generation, with their social media and smart phones, will welcome new ways to receive financial advice. As an example, we believe that, many times, they would rather communicate with an advisor online, rather than over a kitchen table.

This is a solution that a number of wealth management firms are staying away from, with the view that it may disenfranchise their current advisors, who may view such a move as one meant to disintermediate them. We look to the internet not instead of our advisors, but as a tool for advisors, to have them relevant for this next generation.

Put another way, hope (in this case, hope that the next generation will automatically graduate to our business model as it exists today), hope is not a viable strategy here.

Number four -- Trust -- in an advisor, an organization, and the markets -- is paramount,

To state that the financial crisis negatively impacted the reputation of the financial industry is surely an understatement. Investors have told us that their confidence was shaken not only by the market downturn and the large losses in their portfolios, but also by the failure of major financial institutions, by the executive bonuses, and by the fallout from the Bernie Madoff scandal.

Despite all of that, and contrary to public perception, clients continue to trust their advisors. They've been to the depths and endured and survived the worst together, and today their bonds appear to be stronger than ever.

In a recent survey, more than eight in 10 affluent investors expressed satisfaction with their advisors. All of this reinforces the importance of trust as the glue of the advisor-client relationship. Moreover, when connections to advisors are strong, other issues become less important.

For example, as long as clients perceive that their advisors are providing value, the question of fees becomes secondary. Put another way, fees tend to become THE issue in the absence of the view that value is being delivered.

With that said, what exactly is the prescription for strong relationships?

Believe it or not.....We have found that the single most important element is the frequency of client contact. Our research suggests that client satisfaction increases directly with the number of times an advisor keeps in touch. Clients are quicker to forgive losses than they are to forgive advisors who fail to return phone calls promptly, which in turn is the top reason for firing an advisor. In some ways, it's as simple as that.

In addition to frequency of contacts, clients want their advisors to anticipate and address their needs, provide attentive service, resolve their problems quickly, while continuing to move forward to meet their long-term financial goals.

Obviously, all is not perfect in our business and there is always work to do. But the very strength of advisor-client relationships presents opportunities to deepen bonds both with primary clients, as well as with other family members and family businesses.

When their client relationships are strong, advisors can offer more holistic strategies that go beyond traditional investments to leverage wider capabilities -- for example, banking and lending services, wealth structuring and estate planning.

Number five -- The wealth management industry has the strength to change, and change it must (says Pollyanna).

Today, the outlook for wealth management services has improved dramatically from just two years ago when so many predicted the demise of our industry. Global wealth has rebounded, global assets under management surged in 2010 to $16.5 trillion, and national full-serve wealth managers have actually increased their share of $250,000-plus households at the fastest pace in the industry -- that according to Empirical Research Partners.

Reassuring as all of that may seem, the landscape for our business continues to change and present new challenges as more people seek financial advice and guidance in new and different ways. And to keep moving forward, we must continue to change and innovate in ways that may not always be comfortable, and that, in fact, will require considerable commitment and resources.

As a result, the financial dynamics of our business will likely favor large firms, with the scale to make significant investments in the business on one end of the spectrum, and more specialized firms on the other. For our part, we are challenging ourselves to drive change of our own to create a new reality of client service for 21st century investors.

Most important in this, we believe, is to recognize that the advisor-client relationship is the strongest in financial services, and we must continue to deepen and evolve it to embrace strategies to meet clients' full financial goals.

Toward that end, we have put together what we call a survive-and-prosper checklist that speaks to clients' evolving attitudes in the new investment environment. Some examples:

  • Understand that risk aversion is a rising client priority
  • Meet life goals, not market benchmarks
  • Provide highly personalized asset allocation
  • Build bridges to clients' families, women and the young
  • Recognize that the traditional definition of retirement is changing
  • Commit to clients for the very long-term
  • Innovate relentlessly
  • Communicate, communicate and communicate
  • And, strive always to keep it simple and clear

Finally, I would add, as I know that ICI has done -- think global. We are in an era where emerging economies will account for 70 percent of global growth this year. The front-line emerging economies -- the so-called BRICS -- are growing 2 and 3 times faster than the U.S.

And while economic growth doesn't translate into market returns in every year, it sure does over time. Therefore, we need to be thinking intently about the globalization of investment and equities vs. U.S. centric portfolios, as I know you all are and will be.

Summing up

To sum up, the solutions we seek must begin not by picking a particular product, fund or strategy but, rather, by developing more holistic solutions to help clients clearly define their goals for the next stage of their lives, which brings me to a topic about which many of you have asked -- which is our support of a fiduciary standard of care for clients.

Some of you know that we have long believed that existing legislation had not gone far enough in providing equal protections to all investors, or in preserving their freedom to choose from a variety of investment solutions and how they pay for them.

It's also clear to us that the differences between financial advisors at brokerage firms and RIAs are confusing for investors -- and thanks to years of negative advertising about which service model is superior, muddier than ever.

Today, we have an important historic opportunity to go further, to set a universal standard that delivers much-needed clarity and assurance to investors that whether they do business with an RIA or broker dealer financial advisor, they are receiving the highest standard of care and protection -- the fiduciary standard that defines RIAs plus the higher standards of supervisory requirements, ongoing educational requirements, statement requirements, advertising requirements and so

on, which are meaningful...the belts and suspenders that define firms like ours.

Together, we should all seek to elevate our entire profession and -- importantly -- tell investors why they should care about this and demand that we do. Getting to a universal standard across RIAs and b-d's is getting almost no attention, but

one might argue that getting this right is one of the most important things we can do as we seek to strengthen our capital markets and earn back the trust of a wary investing public

If you can indulge me for another moment, I have an important request...

I mentioned that I am not a fan of the words "cross-sell" -- to me, that is something we do TO our clients, not FOR our clients -- it is different from what I see our great advisors do every day, which is to assess clients' needs and then deliver solutions, no matter where those solutions reside at our institution, to solve their problems.

So, while I am on pet peeves, can we also get rid of the term "retail distribution" when talking about the wealth management business? It's a term of diminishment....for all of us. We can debate the term "retail"...honestly, it doesn't particularly well describe the Merrill Lynch or UST client base, or even the Merrill Edge client base. But I really won't debate the term "distribution" -- maybe you can, but I can't make it sound in any way a positive -- I love you all, but the business I have responsibility for does not exist to be your distribution channel -- it brings up images of our working for you rather than for our clients...of our pushing your products on our clients in an assembly line fashion.

We both know by now that it's quite the contrary -- which is that our advisors have the tools and resources to determine the best solutions for clients and no financial incentives -- EVER -- to do anything but that.

Importantly, I believe we share an interest in a change of terms here as well.

When I think of all the smart portfolio managers and terrific insights and tools that this industry provides to the great benefit of advisors and clients, we need to elevate this profession in the eyes of industry watchers and clients -- making sure that our industry vernacular catches up with the realities of the significant amount of positive change that has taken place in our industry.

And since I don't allow my guys to bring up a problem without a solution, may I suggest instead "Private Client Solutions" or "Individual Investor Advisory" for your business cards instead?

So, in ending, getting it right must always begin with our clients -- putting them at the center, listening to them and understanding that it's about their vision, goals and success, not about ours.

What we do is not a game -- if, as advisors or fund managers, we fail to do a great job for clients, and if our client base continues to age, the next generation of clients will be at risk of being lost.

That would truly be a tragedy because think about what this nation needs most at this time: a resurgence of our economy led by millions of our citizens and enterprises working, investing, producing and growing.

Toward that end, the promise of the wealth management industry -- as expressed through our respective roles -- has been and remains great. Ultimately, what we do in helping individuals and families plan for their future in a noble profession -- yes, noble, because we can make a positive difference in people's lives.

We are not about bps and alpha and standard deviations, our core, we are about empowering millions of people to realize their hopes and dreams. And, if we do this, our collective future will be bright.

Thank you all for inviting me today...I look forward to your questions