In Practice October 8, 2007

Enhancing the Client Experience

People don’t stay with a financial services firm because of the brand; they stay because they have forged a relationship with an adviser they trust.
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“People do business with people,” said Robert McCann, Vice Chairman and President, Global Private Client Group at Merrill Lynch & Co., Inc., and, despite the massive change going on in the financial services industry, that trait will not change, he predicted, speaking at the Securities Industry and Financial Markets Association (SIFMA) Sales and Marketing Conference, in New York, New York last week.

Therefore, if an adviser merely sells a product, McCann said, he can lose the client as soon as someone else comes along with a better product or who is a better salesman. However, if you as the adviser become an essential partner in your client’s life, if you “have a seat at your client’s kitchen table,” then, you begin a relationship that can last a lifetime.

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Improving the Adviser Environment

 

At Stifel, Nicolaus & Co., Inc., said Ronald Kruszewski, CEO and President of the firm, the center of the business model is the financial advisers; in other words, “the broker is the client.”

Therefore, when looking to enhance the experience, Kruszewski said, also speaking at the conference, Stifel, Nicolaus & Co., Inc., looks to improve the financial advisers’ environment, which will then lead to enhanced and improved service to clients. The business is the same as it was 10 years ago, Kruszewski said, it is “stocks, bonds, and mutual funds.” However, the client experience has to evolve and management of the financial services firms needs to get behind that.

McCann agreed: financial advisers need to think about the evolving needs of their clients and management needs to give them the best tools they need to succeed, he explained. For example. McCann said that Merrill Lynch is investing in technology and working on innovations to enhance the client experience. One area in particular getting attention is that of opening an account. McCann said that it currently takes about 35 minutes to open an account, and it can take longer with a new client for which the adviser doesn’t have any information and has to input it all instead of having some fields automatically populated, as for an existing client. Therefore, Merrill Lynch is working on speeding up the process, so advisers spend less time with their heads down transferring data and more time looking at client, McCann said; all to enhance the client experience.

“If the end client doesn’t win, there is no reason for the rest of us to exist,” McCann said.

Client Change

 

Globalization has hit the financial services industry hard, McCann commented, and this has changed who the clients are and who the clients are likely to be. It also affects how clients interact with their advisers.

Wealth is being generated in new areas, McCann said, “in places we never anticipated.” The industry is also seeing wealth creation that appears to have no boundaries. Citing products such as Myspace, YouTube, and Facebook (all founded by people in their twenties) as extreme examples, McCann said the wealthy are getting younger and are more global.

The fast pace of change and new demographic offer a set of opportunities, McCann said, and it is important to “make sure that we stay ahead of the curve [because] we can become dated very quickly.”

 

IMHO October 6, 2007

IMHO: The Devil in the Details

The testimony presented at last week’s hearing by the House Education and Labor Committee on the issue of 401(k) fees was remarkably consistent, IMHO, certainly compared with the last time the Committee took up the issue.
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At a minimum, we seem to have moved past the question of whether more fee disclosure is needed to what kind of disclosures are needed, and how we can make them.
At the risk of over-generalizing the perspectives of the individuals (and individuals on behalf of groups) who shared their experience/expertise with the House Committee, it seems to me that everyone supports the following conclusions:
(1) We need a better understanding of 401(k) fees.
(2) We need more disclosure about what 401(k) fees are.
(3) We should let the Department of Labor finish their regulations on fee disclosure before doing anything legislatively.
(4) Legislation mandating a specific fund option is not a good idea (Congressman Miller’s bill, The 401(k) Fair Disclosure for Retirement Security Act of 2007, would mandate that retirement plans offer at least one lower-cost, balanced index fund in their investment lineup—see “Fee Disclosure Legislation Introduced in House’).

After the testimony had been presented, Congressman Rob Andrews (D-New Jersey) asked witness Lew Minsky, an attorney testifying on behalf of the ERISA Industry Committee, the U.S. Chamber of Commerce, the Profit Sharing/401(k) Council of America, and other organizations, what would be the problem with a specific fee disclosure to participants—a breakdown of recordkeeping, money management, and “other.’ To which Mr. Minsky replied, “I’m not sure that anything is inherently wrong with it. It’s the devil in the details….’

The Right Questions

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Details matter in such things, of course—not only in legislation, but also in the reality of what 401(k) plans are paying for what they are getting. Unfortunately, it frequently comes down not just to asking the questions, but to asking the right questions. Jon Chambers, an investment consultant and Principal at Schultz, Collins, Lawson, Chambers, Inc., told the committee about a situation where his firm had been engaged in a mapping study for a large 401(k) plan. In the process, they also conducted a fee reasonableness review for the plan sponsor. “The plan sponsor thought the plan fees must be reasonable, because as they reviewed each investment option, each investment option had reasonable fees,’ Chambers recounted.

But the reasonableness review found that the total fees generated by the bundled arrangement currently in place were approximately $1 million higher than “necessary’ under an unbundled arrangement, according to Chambers. In that case, what hadn’t been communicated (or inquired about) was the availability of a share class more appropriate for the asset size of the plan.

I hear stories like that from advisers all the time, of course. And while I don’t believe that most plan sponsors are being taken advantage of, I am nonetheless concerned that many are. How could they not be, what with the labyrinth that many must go through to simply discover what the different fee types are, much less how much they are, and who that money flows to for what services (and, IMHO, in too many cases, for WHAT services is the better question)?

There are devils in the details of all this, of course—not the least of which is how we help participants who don’t know the difference between a stock and a bond appreciate the nuances of revenue-sharing—but we are long past the point of debating whether more disclosure is needed. And if the hearing last week established nothing beyond that, it was well worth the effort.

More information about last week’s hearing is available at Fee Disclosure Proposal Draws Industry Criticism at House Committee Hearing. You can watch last week’s hearing online HERE.

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