Despite company-wide write-downs on Wall Street, and a new competitive force emerging from the independent advisory market, Merrill Lynch doesn’t appear to have lost the swagger that comes with having the world’s largest network of financial advisors. Matthew Smith interviews Merrill head of Wealth Management for the Americas, Dan Sontag.

Despite company-wide write-downs on Wall Street, and a new competitive force emerging from the independent advisory market, Merrill Lynch doesn’t appear to have lost the swagger that comes with having the world’s largest network of financial advisors. Matthew Smith interviews Merrill head of Wealth Management for the Americas, Dan Sontag.

It has been an interesting few months to say the least for the head of a Wall Street financial services business – something Dan Sontag knows well, having been elevated to the role of senior vice president and head of Americas Wealth Management within the Merrill Lynch’s Global Wealth Management group in January this year.

Previously Mr Sontag was responsible for the firm’s network of advisory and private banking offices in the US and Latin America; since January he has taken on responsibility for the broader wealth management business, including investment and insurance products, as well as cross selling products and services into the Global Markets and Investment Banking businesses.

Thoughout his 30-year career at Merrill, Mr Sontag has been involved in one way or another with organising and recruiting financial advisors. When asked to describe the current environment for finding and employing advisor talent, he said: “In a word, I’d describe it as ‘challenging’”.

For the last three-years Merrill has maintained an average 4.6 per cent annual growth in the number of financial advisors employed within the 700-odd offices in North and Latin America that make up the giant (close to) 1,700 financial advisor network.

For this calendar year, Mr Sontag says net growth in advisor numbers at the firm will look more like 2-3 per cent, a rate he predicts he’ll need to poach some 400 advisors from competitors’ firms in order to achieve.

“We feel like the second half will be a better environment to grow the wealth management business.”

Much of Mr Sontag’s strategy is currently aimed at protecting Merrill advisors from poachers.

“If you want to think about growing your FA force, the first thing you have to be sure you do is hang onto your best people, otherwise you have to hire one advisor, plus another, to replace the one you lost,” he said. “First thing you are trying to do is you are trying to hang onto your current advisor population.”

Mr Sontag puts what he describes as the “unrest” in the advice marketplace down to a combination of the losses posted by the broader investment firms, coupled with the volatile nature of the market.

All of Wall Street’s big names have suffered reputation damage following the last two quarters of write downs in the wake of the sub prime crisis – Merrill is no different with the firm announcing a $16 billion loss for 2007, then reporting a $11.5 billion write-down in the fourth quarter.

Mr Sontag’s response has been to travel the country speaking with the firm’s financial advisors in an effort to keep them from seeking what could be perceived as greener pastures outside the firm.

“What we are doing is putting these things in perspective; we are talking about the fact these are industry issues, although it feels personal, because it’s your firm sometimes they’re talking about,” he says.

Most recently he was in Atlanta and Jacksonville with Merrill chief executive John Thain, where town halls became the setting for a discussion with 600 and 150 wealth management employees in the respective cities.

The previous week he and Merrill Global Wealth Management president Robert McCann visited the firm’s headquarters both downtown and midtown New York where the two executives spoke to another group of 1,000 financial advisors in total.

In April Mr McCann and Mr Sontag will embark on a four day “offsite” with the firm’s top 225 producers; many of these advisors will no doubt already have an offer on the table from a rival firm to jump ship.

“If you look at the press, all firms are going through similar issues, and when you couple that with the volatility in the market, sure it causes some unrest,” he says.

Recruiters will tell you competition for advice talent is simply a result of the supply/demand equation.

“There are fewer than ever trainees coming through training programmes because of the baby boomer demographic, and there are fewer people graduating because of the [increasing] training and education standards,” said Danny Sarch, president of Leitner Search Consultants, a recruiter that specialises in placing senior financial advisors.

Advisors employed by Merrill Lynch will go into one of three advice channels – a call centre for clients with less than $250,000 of investable assets; a “mass-affluent” category catering to clients with between $250,000 and $10 million; or an ultra high net worth channel, where advisors have relationships with clients that invest $10 million and up. The Merrill Lynch private banking business, where clients in the ultra high net worth category are serviced, is 12-years old and employs 425 advisors, according to Mr Sontag.

Last year the $10 million plus client category brought $650 million in revenue to the business and was up 25 per cent over the previous year, compared to the broader FA business that may be much larger but grew just 14 per cent during the same period.

“Frankly, in spite of the current environment, the wealth that has been created in the last 20 years or so in the US is creating a unique offering in the $10million-plus category, and we expect that to grow at twice the rate of the broader FA business,” says Mr Sontag.

As a result, this category of advisors is the most sort-after in the industry at the moment, and firms are increasingly prepared to pay big sign-on bonuses to attract talent.

An advisor who earns over $1 million per year in fees currently in the US should be able to negotiate a 100 per cent bonus offer to jump between firms, says Andy Tasnady, managing partner for compensation consultant Tasnady & Associates.

“You get a check, a cash payment in your account, but you would owe that back if you left the company before the defined period. It’s like a loan they write off over the period,” Mr Tasnady explains. He adds that sign-on bonuses for the same advisor less than a decade ago would have looked more like 30-40 per cent.

This competition for talent in the UHNW advisor category was highlighted by JPMorgan’s recent retention package offered to Bear Stearn’s top producing advisors – those who earned at least $500,000 in commissions and fees during the past year were offered 100 per cent of their annual output, mostly in cash.

While Mr Sontag eludes that Merrill is in discussions with all the “best and brightest talent at other firms”, he refuses to comment on any specific negotiations with his competitors in the marketplace.

Generally though, he acknowledges: “It’s an aggressive offer versus some deals that have been done in the last several years.”

Merrill’s competition for the hearts and wallets of wealthy clients and their advisors remains within the playing field of the traditional brokerage business, despite the recent trend that has seen Registered Investment Advisory networks increase their share of the market in recent years.

According to Cerulli Associates data, there has been up to 20 per cent growth in advisor numbers year-on-year into the RIAs market, while wire house advisor numbers have remained flat and are even in decline.

In terms of assets as well, the RIA market is the fastest growing advice segment in the US. Philip Palaveev, a principal with US consultancy, Moss Adams, says the amount of client assets within RIAs businesses have doubled to total $2 trillion during the last five years.

Currently Merrill’s advice strategy has no direct exposure to the RIA model.

Merrill’s established Retail Clearing business provides investment platforms, technology, products and services to many RIA practices, but the firm stops short of taking equity or forming partnerships in the RIA market.

Mr Sontag correctly points out the RIA growth is coming from a much lower base than the established wire houses – in total the US retail equities industry is estimated to be between $12 -13 trillion in size, and RIAs currently have just 20 per cent of that.

He believes the prevailing economic downturn will lead clients back to the recognised Wall Street names.

“Very good growth has taken place in that market in the last four-years during a time, with the benefit of hindsight, that has been a very good market environment, although it doesn’t feel that way at the moment. It will be more interesting to see what those figures look like through 2008 in a more challenging environment.”

In terms of talent retention, Mr Sontag doesn’t see the RIA segment as a competitive threat in the slightest.

“We track where we lose people to, and we lose very few people to the RIA space. I’m not telling you that it is not growing… We think we can take advantage of growth in the RIA space by being a provider of products and services, without being directly involved,” he says.

Despite a Securities Exchange Commission ruling in October last year requiring fee-based brokerage businesses to either register as an investment advisory practice (and therefore adhere to strict fiduciary standards) or stop giving advice perceived by clients to be independent, Merrill says “virtually no client assets” were transferred out of the firm in the forth quarter.

Merrill had $100 million in fee-based brokerage accounts that became displaced as a result of the new rule, of which 75 per cent migrated into the firm’s other fee-based accounts (which presumably meet the SEC’s new requirements), the remainder of the assets were dispersed into Merrill’s traditional commission based accounts.

While the polarisation between the RIA and brokerage advice segments continues to play out, Mr Sontag doesn’t currently believe there is an opportunity for Merrill to be directly invested in the independent space.

“I don’t feel like I need to be involved in the growth [of the RIA space] in terms of the channel, but I am keeping an eye on it,” he says.

Generally, Mr Sontag is confident in Merrill’s existing advice offering. He says the firm is currently in the midst of reviewing its advisor remuneration – to be finalised in the third quarter this year which could potentially result in some tweaking to the current offer – but he emphasises this is a regular “annual review” process and is no different to any other year.

“We are the standard in the market place, particularly in the US; we feel confident we will continue to put distance between us and our competitors, by whatever measure you look at,” says Mr Sontag.

He predicts Merrill will be able to achieve double-digit growth in revenue from its advice networks this calendar year. Like many other broad based investment firms entering an environment of slow economic growth, Merrill will rely on drawing new assets out of existing clients across other parts of the business. Mr Sontag will be doing just that – as part of his new role he is also responsible for the firm's new Global Markets and Investment Banking Client Coverage Initiative.