Answered>Order 27597

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Cons:

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Merrill Lynch: Supernova

Founded in 1907, Merrill Lynch grew rapidly under its founders’ strategy to “Bring

Wall Street to Main Street.” In the 1970s, the firm became a powerful force in investment

banking in addition to retail brokerage. By 2000, Merrill described itself as “the

preeminent financial management and advisory company-serving governments,

institutions, and investors throughout the world.” In 2003, Merrill Lynch was one of

the leading financial-services firms in the world, and was the largest of the “broker

dealer” firms on Wall Street, employing more financial advisors (individuals who

managed relationships with retail clients) than any of its competitors

Jim Walker was a member of Merrill’s Client Relationship Group, part of Merrill’s

Private Client Group, which was responsible for financial-advisory services for

individuals (retail brokerage). The retail-brokerage environment had begun to change

in the 1970s with the partial deregulation of stock brokering. Under deregulation,

new firms entered the market with different service offerings. For example, Charles

Schwab offered discounted trading directed by the investor, in contrast to the traditional

brokerage model in which investors received advice from their stockbroker, and

or placed orders through him or her. L Mutual-fund distribution was also deregulated in the 1970s, enabling firms such as Fidelity Investments to compete with stock brokerages indirectly

by selling shares in their mutual funds to the public directly.

FINANCIAL ADVISORS

Retail brokerages such as Merrill Lynch delivered their services to individual clients

through stockbrokers, or “financial advisors” (FAs) as they were called at Merrill.

Typically, an FA would bring clients to the firm through his or her relationships, networking,

professional alliances, industry affiliations, and by “cold calling”2 individuals

thought to be good prospects.

Once an account was opened, the experience of an individual client varied considerably

depending on his or her financial advisor. Some FAs routinely contacted clients

to check on the client, offer advice on existing investments with the firm, and solicit

additional business. Others rarely contacted their clients except to offer them new

investment products the firm wanted to sell. For these FAs, contact with clients more

often occurred when the client called to initiate a trade, or report a problem. According

to a senior Merrill manager, “Unfortunately, a lot of our FAs fall into this category.

The problem is, we’ve always charged for good service, and everyone has wanted to

deliver it, but some of our people haven’t followed through.”

FA compensation, like that of most stockbrokers, was purely variable, based on the

quantity of business they brought to the firm. Compensation was a combination of:

1. A percentage of the revenue generated from commission for buying and selling

financial products in a client’s account (“trades”). For example, if a client were

charged $120 to trade 1,000 shares of stock, the FA might keep 40 percent.

2. A percentage o f the revenue generated from “annuitized,” or fee-based accounts

in which a client did not pay to trade securities, but was annually charged

a small percentage o f assets, varying with the size o f the account. For example, a

customer with $1 million with the firm might pay 1 percent o f assets.3 The FA

would keep a portion o f that 1 percent. Increasing the portion o f total assets in

annuitized accounts was considered a priority by most Wall Street brokerages.

Stockbrokers in general, and Merrill Lynch FAs in particular, were well paid. Industry

observers noted that Merrill FAs were particularly successful because the firm had

been adept at hiring strong performers and weeding out the less successful. Some also

believed that Merrill had done a better job than many o f its competitors o f ensuring

a level o f quality in the delivery o f its service. Established brokers typically earned

several hundred thousand dollars annually, with the most successful earning more than

a million dollars each year.

FAs enjoyed the autonomy their jobs provided. According to one: “What /bring in,

is mine. I work for Merrill Lynch, but I have my own clients. As long as I keep within

the letter o f the law I can serve them as I like and sell them any o f Merrill’s products.

I ‘ m in competition with every other FA in this office. I f Merrill wants me to be a “we”

person, they can pay me a salary-they don’t.”

Good FAs, like all good stockbrokers, were in demand among the various retailbrokerage

firms, and could earn additional income by changing firms, when the

acquiring firm would pay a substantial bonus to the new broker based on his or her

“production” or historical revenue volume. The bonus was designed to compensate the

stockbroker for the portion o f clients who remained with the old firm rather than moving

with the broker. However, the bonus more than compensated for the loss. In fact,

many firms viewed the “signing bonus” as a way to acquire both brokers and clients.

Historically, the relationship between the stockbroker and the client was considered to

be stronger than the relationship between the client and the firm, or the firm and the

stockbroker. Some brokers changed firms frequently.

Stockbroker acquisition was the job o f the head o f a local office. These individuals

were often highly talented brokers who split their time between their own clients and

managing the other brokers in the office. Many found the acquisition o f new brokers a

thrill, not unlike the acquisition o f new clients.

FAs, like all stockbrokers, came from a variety o f backgrounds. They typically had

college educations, and all U.S. brokers were required to pass examinations such as

the National Association o f Securities Dealers’ Series 7. All successful stockbrokers

were gifted salespeople. Many used sporting terms to describe the acquisition o f new

clients, an activity (when successful) they uniformly enjoyed.

The acquisition o f new clients resulted in what many brokers called their “book.”

This was a broker’s list o f clients having an account at the firm. Many firms, including

Merrill Lynch, had encouraged their brokers to increase the size o f their books,

paying them incentives to open new accounts. According to one Merrill FA, “In the

1990s, Merrill ran what it called ‘The Masters’ program-you got a trip to Hawaii if

you opened enough new accounts. Everyone was opening any account they could.

Service, customer retention, and profitability didn’t matter-it was all about new

accounts.” As a result, the size o f their book came to be important to many FAs.

Another noted: “I know I ‘ m going to be OK, even in a downturn, i f I’ve got a big

book. All those names really make you feel secure, and that’s important in a business like this where you can only rely on yourself and you have to keep producing if you

want to eat.”

Merrill Lynch’s FAs were thought to be among the best on Wall Street. The firm

enjoyed a reputation for being an attractive place to work, based on (1) the support

provided for brokers in the form of a strong brand and good financial products, and

(2) the freedom brokers were given to effectively run their own businesses as long as

they generated enough business, used Merrill Lynch financial products, and met basic

ethical standards. An executive of another brokerage commented on Merrill Lynch and

its FAs: “They’re the best-they do what we do, what everyone does, but they do it better.

How they ‘out execute’ us I’m not exactly sure, but they do it-again and again.”

SUPERNOVA

Supernova was the name given to a new way to manage client relationships that originated

in one of Merrill Lynch’s Indianapolis offices (Exhibit 3 illustrates Merrill’s

field organization structure). Unlike a strategic initiative from headquarters, it came up

through the ranks as a strategy for implementation, in response to conceptual strategy

set at the top.

The “father” of Supernova was Rob Knapp, who ran Merrill Lynch’s Midwest

district. In 1995, Knapp had had a good year in revenue terms, but was concerned

about future revenues because his district ranked last in client satisfaction among the

32 districts in the country. Eighteen months later, following the implementation of a

Supernova predecessor, Knapp’s office ranked fourth

Client Service before Supernova

Merrill’s research led management to believe that three aspects of a relationship were

critical to client satisfaction:

1. The frequency and quality of contact

2. Rapid response to problems

3. Attention to details

An FA commented on the ability to deliver these prior to Supernova:

Most ofus didn’t pay any attention to frequency of contact-if a client called, we spoke

to them. We didn’t have time to make calls to clients because we were busy dealing with

clients calling us-wanting us to fix problems they were having, hold their hands when the markets declined, or do trades. Extra time was spent prospecting-and we had to do

a lot of that given the number of clients who quit.

It was hard to respond to problems quickly. We used to get overwhelmed-my

assistant was spending most of her time answering the phones-she didn’t have time to

deal with problems, which meant I had to deal with them, except I was supposed to be

dealing with clients.

Attention to detail means things like being aware of life events for a client-an

impending birth, retirement, the desire to refinance a mortgage. These are really

important because they represent opportunities to meet a client’s needs by selling them

something they need and want. But we didn’t have time to listen for these kinds of

details-we were just trying to keep our heads above water.

According to Knapp: “The objective of Supernova is to create the ‘ultimate’ client

experience. We asked ourselves, ‘What would the ultimate client experience look

like?’ That was when we came up with 12-4-2.”

12-4-2

12-4-2 was the Supernova description of what clients’ minimum annual contact with

their financial advisor should be: 12 monthly contacts (to stay in touch and ask for

updates on financial goals or changes in needs), of which 4 were portfolio reviews,

and 2 were face-to-face meetings. Some clients needed more contact, but 12-4-2 was

the minimum.

12-4-2 was based on studies conducted within and outside of Merrill on client

desires. According to one FA, 12-4-2 enforced discipline: “I’m just not that

organized-I’m a people person. 12-4-2 forces me to make the contacts I know I

should make, but I’ve always found excuses not to.”

12-4-2 was predicated upon the completion of a financial plan for the client at the

beginning of the relationship. Although Merrill had been encouraging all of its FAs to

develop financial plans for their clients, according to several FAs, “More often than

not, it wasn’t happening.”

While 12-4-2 was a breakthrough from the clients’ perspective, it posed a dilemma

for the FAs who wanted to implement it: there were too few hours in the day to deliver

even a fraction of 12-4-2 because the average Merrill FA had 550 clients. As a result,

the way FAs planning to adopt 12-4-2 conducted their business had to change. The

changes ultimately becoming a part of Supernova, in addition to 12-4-2 and financial

planning, were described as segmentation, organization, and acquisition.

Segmentation

Knapp used an analogy to suits to discuss the principle of client segmentation:

Let’s say you really like the process of buying suits. Over the years, you develop a really

big collection of suits. The problem is, you don’t have the space to keep them all in good

condition. Your closet’s only big enough for 20. So you clean out your closet, and you

send all but your 20 best suits to a relative. During the next year, you buy a few more

suits-good ones. Remember, you like buying suits. At the end of the year, you clean

out your closet again-and you force yourself to keep only the 20 best suits. Now, you

have 20 really beautiful suits. You’re happy, the suits have enough space in the closet,

and you always look great.

It’s no different with clients. The typical FA has 550. She can’t give them all good

service-there’s not enough room in the closet. Most of them aren’t capable of being

very profitable-most aren’t really good suits. Only by segmenting clients and only

keeping the best can an FA have time to give them the service they need-that will

make them loyal.

Knapp believed that the appropriate number of clients was 200 based on an analysis

he conducted, One Merrill office in

which every FA adopted Supernova set a goal per FA of 200 clients, each having at

least $1 million in annuitized assets at Merrill, or $10,000 in annual production (fees

from trading).

The decision to keep or forgo a client was complex. Fortunately, an FA developed

a spreadsheet model to help other FAs in the process. Developing the model took

11 months, however, once the model was completed an FA could conduct the analysis

in approximately 30 minutes.

The FA who developed the model recognized that in order to deliver the high level

of service he wanted all of his clients to receive he would have to reduce their number.

He initially decided to keep only his top 100 clients. While that decision was easy,

determining which clients made up his top 100 proved difficult.

Initially, he ranked his clients by revenue generation. Then, he ranked them by assets.

He discovered that the two rankings were very different. Third, he ranked his clients

by those he and his assistant liked doing business with. Agc1in, the ranking was different

from the earlier two. In all, he produced 11 rankings based on different criteria for

keeping clients. He then decided to see which clients were on all 11 lists. Thirty-three

clients appeared on every list. Those 33 generated 89 percent of his income during

the previous year. In addition, his assistant noted that only 3 of the 53 clients she had

helped with problems over the past five weeks were among the 33. Ultimately, the FA

kept only those 33 clients, stating, “With those 33 I had 89 percent ofmy income and a lot fewer hassles-I’ve been able to spend my time giving them really great service

and acquiring more really good clients. My income-and my life-has never been

so good.”

Most Supernova FAs decided to reduce their book to (1) 200 primary clients,

(2) important family or business associates of those clients (whom FAs kept to avoid

endangering the primary client relationship), and (3) those clients described as “necessary

to keep if you want to get into heaven.” The ratio of primary clients to important

family or business associates was targeted at 3: 1.

Clients whom an FA decided not to keep were given to another FA or were sent

to the Financial Advisory Center, Merrill’s centralized facility for smaller accounts,

if their assets with Merrill totaled less than $100,000 and were unlikely to increase

in the foreseeable future. The center served these accounts through a toll-free telephone

number and proactively called them at least four times a year to ensure that

their needs were being met. Many clients did not object to this new style of service;

the center’s client-retention rate was actually higher than that of the average FA’s. FAs

received payments from corporate for those clients sent to the center. Several FAs

noted that once transferred, their clients increased the business they did with Merrill,

and as a result, they earned considerably more on them than they had previously. FAs

noted, however, that rumors about corporate ending the payments were rampant. Clients

given to another FA were generally given away with no remuneration. According

to one FA, “This way you’re totally focused on the clients you’re keeping-there’s no

looking over your shoulder.”

Organization

Historically, each FA organized his or her practice in whatever way he or she thought

best. Supernova did not require an FA to adopt a particular organization scheme, but it

did provide tools that many Supernova FAs found useful. Merrill studies of FA desires

indicated that what they wanted most was “more administrative support,” followed

closely by “help getting organized.”

One of the biggest organizational problems FAs encountered involved using their

time effectively. Day-to-day, this meant delegating routine, administrative tasks

to their administrative assistants, called client associates. An FA using Supernova

commented:

In the past, clients wanted to speak with their FA whenever they had a problem or

needed something. I can’t blame them, otherwise they rarely spoke to their FA. Under

Supernova, clients know they’ll speak to their FA at least monthly, in fact, they know

exactly when the conversation is scheduled for. As a result, if they have a problem or

need a small, administrative change, the client associate can usually handle it.

Another FA added: “Clients used to feel it was OK to call and interrupt me whenever.

Now, I’m more of a professional to them. Think about it-would you call your

dentist and expect to speak with him immediately?”

In effect, under Supernova client associates “triaged” client telephone calls, only

involving the FA when necessary.4 Supernova client associates also prepared FAs’

daily “folders.” Each folder contained a client’s most recent financial plan, amendments

to it, and information on the client’s family and business that the FA believed

was germane to the relationship. This included mortgage and tax rates, real estate,

insurance policies, hobbies, immediate family and important relatives/associates, and financial holdings not at Merrill. According to one Supernova FA: “I never want to be

speaking with a client and not have the information I need to do my job-which is to

take care of that client’s total financial-service needs.”

The folder supported the “folder system,” which enforced discipline on the FA in

the following way: client associates set up telephone or in-person meetings between

the FA and clients, consistent with 12-4-2. These meetings were placed on the FA’s

calendar, with FA’s dedicating between six and eight hours each day to these meetings

(the time dedicated to meetings corresponded to the number of clients an FA could

have under Supernova). Each morning, the FA would be given the folders for clients

with whom he or she was meeting that day. These practices accomplished four things: First, they forced the FA to make good on 12-4-2 without increasing his or her

administrative burden.

Second, they ensured that he or she would have the most up-to-date information

available for the meeting.

Third, they induced “folder guilt.” If an FA didn’t contact all the clients on the

list for that day, her client associate would have wasted time preparing the folders.

Because FAs tended to work closely with their client associates, folder guilt was often

strong enough to get the FA to meet her contact obligations, something numerous

“contact systems” had failed to do.

Finally, the folder system helped to ensure that the financial plan the client and

the FA agreed to was implemented, an occasional failure in the past according to

several FAs.

Client associates generally preferred to work under Supernova. According to one

Supernova FA:

The first three months on Supernova are hell for a client associate because the transition

isn’t easy-they’re doing both the traditional work and the Supernova work. But

once everyone settles into the Supernova routine, it’s great. The client associate’s day is

much more predictable-prepare folders for the next day, set up meetings, and deal with

a few problems. Because there are fewer clients-and happier clients-there are fewer

problems, and everyone is happier.

Some FAs experimented with offering bonuses to their client associates to help

them through the transition. At one office, client associates getting their FAs fully segmented

and organized under Supernova received $1,000 directly from the FAs.

The Supernova Service Promise

Commitment to developing a financial plan for every client and 12-4-2, coupled with

(1) segmentation and (2) organization, enabled Supernova FAs to make the following

service promise to their clients:

You are guaranteed three things.

1. You will have a multi-generation financial plan in place.

2. You will be contacted by your FA at least 12 times every year.

3. You will receive rapid response to any problem you may have, hearing from us

within 1 hour, and having resolution within 24.

Acquisition

The final part of Supernova was called “acquisition.” As suggested by Knapp’s suit

analogy, each year a Supernova FA would acquire some new, high-quality clients,

handing the least promising clients displaced by the new clients to another FA, or the

Financial Advisory Center.

The time dedicated to 12-4-2 left between two and four hours each day for client

acquisition, which the FAs found more than adequate. As one commented:

At first, I was skeptical that this would be enough time. What I’ve found is that it’s more

than enough, for two reasons. First, since I segmented my book, gave up all but my top

200, and committed to 12-4-2, my client turnover has decreased dramatically. It used to

be that I had to do a lot of selling just to stay even. In fact, for every new client I got, I

usually lost a client-I had to run just to stay in place.

Second, I’ve found that the best way to get new clients is through my existing clients.

I’ve got a lot of clients who have been so impressed with the way I handle them, they’ve

recommended me to their friends and relatives. I’m pretty obvious about wanting referrals,

so they know I’m hungry for new business. But it doesn’t seem to bother them, as

long as I’m delivering on the service promise.

Many FAs found that referrals were their best source of new business. A number

used their spare time to specialize in financial products of interest to their clients and

potential clients. In one case, an FA lived in an area where many people with company

retirement assets were about to retire. She developed expertise in individual retirement

accounts (IRAs), becoming a local expert. Another FA had a prominent anesthesiologist

as a client. In order to understand him better, he subscribed to anesthesiology journals

and attended professional association meetings. As a result, he received four referrals

that led to four new relationships, each of which brought in more than $1 million.

Supernova FAs found that their greatest problem was to force themselves to become

actively involved in client acquisition once the initial disruption caused by converting

to Supernova was over. According to one: “Under the Supernova way of doing things,

you aren’t constantly putting out fires or worrying about the fact that you’re losing so

many clients-because there aren’t so many fires and your clients don’t leave. To be

honest, you have to light a fire under yourself to get more business instead of just taking

it easy. I call this the ‘golf problem’.”

Some senior managers believed that the “golf problem” was serious because while

FAs adopting Supernova very effectively experienced an immediate increase in compensation,

the average new Supernova adopter saw an initial small reduction in pay. The

senior managers attributed this loss to local management’s failure to coach the average

new adopters to begin their acquiring as early as possible in the transition process.

Transaction and Annuitized FAs

FAs adopting Supernova were both transactional FAs, who were paid by charging fees

per trade, and annuitized FAs. Some were a combination of the two. According to one

fully annuitized FA: “The soft underbelly of annuitized business is that unless you commit

to providing a certain level of service, once you’re being paid whether or not you do

anything, there is less incentive to contact your client. Supernova solves that problem.”

A transactional FA added: Once you call your client a few times having no intention

of selling anything, it’s a lot easier to sell the next time you call. Supernova also helps

because it increases my knowledge of the client-when you know someone better, you

can figure out what their needs a r e – and sell them what they want.”

THE PROCESS OF ADOPTING SUPERNOVA

Supernova had been spread though road-show presentations made by users who were

enthusiastic about what the program had done for them, their client associates, and their

clients. Knapp often used a two-part pitch to “sell” Supernova to potential adopters.

First, he described how good it felt to be delivering, “The Ultimate Client Experience.”

Second, he described Supernova as “Plan, Process, and Discipline,” noting, “You’re going from chaos to plan, process, and discipline- that gives you control of your time.

Once you really move from chaos to control, you can’t go back.”

A Supernova office head noted:

All of my FAs use Supernova-they have no choice. When I’m hiring, I look for people

who are service-oriented, as opposed to transaction-oriented. Lots of people can sell a

mother diapers. But can you make her feel good about them when they’re dirty?

I didn’t force my experienced FAs to adopt the program. My immediate team adopted

it, and the others liked what they saw: the phone doesn’t ring very often; we meet with

the people who pay us, and get rid of the rest; we do very little cold calling-we get new

clients almost exclusively through referrals. Every FA in the office chose to join.

Support for FAs Adopting Supernova

The first step in Supernova adoption was called, “FA buy-in.” Road shows alone did

not ensure buy-in. Skeptical FAs, or those who did not attend road shows, could only

be persuaded by a manager sitting down with them and making a compelling argument

in favor of the program. Some managers asked the FA how much he or she would like

to be earning in a few years. Inevitably, given that FA’s current business, there was no

way the number could be reached. Once the FA realized the implications of the current

situation, the manager could illustrate how the income goal could be reached by

adopting Supernova.

The second step in Supernova adoption was segmentation. After that was accomplished,

financial planning, 12-4-2, organization, and acquisition were introduced.

However, segmentation was often the most difficult to implement. According to an

early Supernova adopter:

Initially, most FAs don’t cut their books deep enough, maybe to 300. It’s really hard to

cut-for years we’ve been told to get more names. After all, who knows if someone

will win the lottery-and some of those clients have been with you for years. The problem

is, you just can’t give 12-4-2 service to 300 clients-you’ll kill yourself trying. If

the leadership isn’t on top ofit, these FAs usually fall off the wagon. A lot of the leadership

is made up of the best transactional people we have-it’s hardest for them to adopt

a relationship perspective. Hunter-gatherers just don’t turn into farmers overnight.

Adoption ranged from what one manager described as “They say their doing Supernova,

but they haven’t even segmented their book” to “Supernova evangelists.”

Merrill Lynch assigned one employee to devote herself exclusively to the program.

She spent her time organizing and participating in road-show presentations on Supernova

and developing new segmentation and organization software to support the program.

She stated:

There’s so much more I’d like to be doing. I need to be helping the FAs over hurdles.

With Supernova, FAs have to fundamentally change. In some locations, the office head

provides a lot of coaching and personal support. But in other offices, there’s no one

there to help. After we conduct our two-day kickoff road-show meeting, we try to find

an FA in the office who’s admired by his peers and is ahead of the pack on Supernova.

We make that person the local resource for the other FAs. But they don’t get anything

for doing it, and they may or may not succeed at Supernova themselves.

There’s a lot we could be doing, like how to run the segmentation software, and how

to set up a folder system. These things aren’t brain surgery, but when you haven’t done it

before it’s tough. We review these at the road shows, but people tend to forget over time.

Most of it can be done over the phone-the average office only needs two hours a week

of in-person assistance during those critical three months after a group of FAs decide to

adopt Supernova. They usually need help segmenting, transitioning clients they are giving

up, getting organized, and changing their day-to-day behaviors.

KNOWN CHALLENGES TO IMPLEMENTATION

Jim Walker had to decide whether or not to recommend the national roll out of Supernova.

As part of his decision making, he reviewed data on Supernova results to date and projections

for the future (see Exhibit 5). In addition, he identified the challenges he would

encounter ifhe decided to go forward. Among Walker’s concerns were the following:

Economic Backdrop

In 2003, times were not good for retail brokerages; stock prices were down, and trading

volumes were depressed (see Exhibit 6). These conditions made people in the

industry tense and

 

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