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Case2 Merrill Lynch: Supernova Rogelio Oliva , Roger Hallowell Gabriel R. Bitran Rogelio, O., Hallowell, R., & Bitran, G. (2013). Case 2 Merrill Lynch: supernova. In Zeithaml, V. A., Bitner, M. J., & Gremler, D. D.(4th ed., pp 516-536). Services marketing: Integrating customer focus across the firm. New York:McGraw-Hill Irwin. There's a good chance that Supernova is the right thing at the right time. But I need to be sure before I recommend total adoption. Even if I do decide to back it, how do we roll it out? How can we get this organization, top, middle, and front-line, to buy into i t - a n d change their behavior accordingly? Does everyone need to buy in, or will it be enough to have a "critical mass?" What would a critical mass look like? - Jim Walker, managing director and chief administrative officer, Merrill Lynch Client Relationship Group 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 o f the "broker dealer" firms on Wall Street, employing more financial advisors (individuals who managed relationships with retail clients) than any o f its competitors (see Exhibit 1). Professor Rogelio Oliva, Roger Hallowell (MBA '89, DBA '97) of the Center for Executive Development, and MIT Sloan Nippon Telephone and Telegraph Professor of Management Science. It is based, in part, on research conducted by Bassim Halaby, Qunmei Li, Hugo Barra, Luca Dona, Geyza Salgado, Muhammad Farid, and Mary Schaefer of MIT Sloan. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright© 2003 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means-electronic, mechanical, photocopying, recording, or otherwise-without the permission of Harvard Business School. EXHIBIT 1 Stockbrokerages and Stockbrokers/Financial Advisors Source: Adapted from Securities Industry Yearbook, Securities Industry Association, Inc.: Washington, D.C., 2002. Firm Merrilltynch & Co:, Inc:. Salomon Smith Barney Holdings,.lnc. Morgan Stanley UBS PaineWebber Inc. Edward Jones 516 Stockbrokers/FAs. (Registered reps} Rank 15,753 13,826 13,690 8,801 8,595 1 2 3 4 5 EXHIBIT 2 Market Share for Traditional (full-line) Brokers and Discounters Source: Created using data from Securities Industries Association DATABANK. Market Share of NYSE Commissions Percent 60 50 Full-line brokers 40 30 20 10 o Case 2 Merrill Lynch 517 # - * - - g - & Note: Post-1997, this chart may not reflect all full-line broker revenues as many full-line brokerages began to encourage their brokers/FAs to convert their accounts from commission generating (traditional) to fee-based (annuitized). 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. Exhibit 2 illustrates market share of traditional brokers and discounters. 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. 1 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. 1Prior to the 1970s, mutual-fund shares had to be sold through financial intermediaries such as stockbrokers. In 2003 Fidelity Investments was the largest mutual-fund company in the world. 2"Cold calling" meant contacting potential clients with no prior introduction, often by telephone or direct mail. 518 Case 2 Merrill Lynch 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 m a t t e r - i t 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 3The percentage varied considerably based on whether or not the client used third-party investment advice. Case 2 Merrill Lynch EXHIBIT 3 Merrill Lynch Private Client Group Field Organization Structure Source: Merrill Lynch. 519 Headquarters t t t t District (e.g., Midwest) Complex (e.g., metro Indianapolis) Office (a single physical location, or several very small locations) FA 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: f V ,. g $ 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 520 Case 2 Merrill Lynch 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 o f 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 o f 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. Case 2 EXHIBIT 4 Merrill Lynch 521 12-4-2 and the Need to Segment Source: Merrill Lynch. 4A. Number of Primary Clients: 550 12-4-2 Contacts per Week: 22 semi-annual, 22 quarterly, and 88 monthly calls Weeks per Year = Minutes Required for: Face-to-Face Meeting Quarterly Phone Review Monthly Phone Contact Minutes Consumed per Week (in hours) Assumptions 50 Minutes Consumed 90 45 15 1,980 990 1,320 Time Available for Acquisition and Administration 72 0 4B. Number of Primary Clients: 200 12-4-2 Contacts per Week: 8 semi-annual, 8 quarterly and 32 monthly calls Weeks per Year = Minutes Required for: Face-to-Face Meeting Quarterly Phone Review Monthly Phone Contact Minutes Consumed per Week (in hours) Time Available for Acquisition and Administration (in hours) Assumptions 50 Minutes Consumed 90 45 15 720 360 480 26 14 Note: Excludes nonprimary clients. Knapp believed that the appropriate number of clients was 200 based on an analysis he conducted, which is illustrated in Exhibits 4 (A) and (B). 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 522 Case 2 Merrill Lynch 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 4Note that for legal reasons, transactions involving buying or selling were conducted by FAs or registered client associates. Case 2 Merrill Lynch 523 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. 524 Case 2 Merrill Lynch 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 Case 2 Merrill Lynch 525 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 c u t - f o r years we've been told to get more names. After all, who knows i f 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. I f 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 o f 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. 526 Case 2 Merrill Lynch 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 directed the attention of Merrill's top managers to immediate issues such as meeting earnings projections. Conversely, some believed that a downturn was the best time to drive change through a brokerage firm since firms tended to poach each other's brokers less often while production was down. Politics and Recognition Supernova was seen as the child of its founders. Those in the firm who liked its founders tended to like it. Those with mixed feelings about its founders tended to be less positive. Professional jealousy may also have played a role in negative reactions. Recognition of, and or rewards for Supernova's founders might exacerbate this situation. EXHIBIT 5 Selected Supernova Results and Projections Source: Merrill Lynch. Results Merrill Lynch's Management Science Group studied a sample of 75 Supernova FAs and arrived at the following conclusions: Average number of clients: 208 with average assets of $333,000. Upon joining Supernova transferred 14 clients to another FA (average assets $153,000), and 67 clients to the centralized facility (average assets $30,000). Supernova FA production (revenue) increased 1 percent while production from a control group of non-Supernova FAs designed to mirror the demographics of the Supernova group decreased 6 percent. Total FA population production declined 12 percent (the markets were down during the period of the study). Market errors (mistakes in processing transactions due to FA or client associate errors Merrill was responsible for) declined 54 percent. The following client satisfaction measures improved: - Satisfaction with client associate service - Percentage of clients feeling they need more FA contact (declined) - Percentage of clients feeling their FA exceeds in "looking out for their best interests" - Satisfaction with FA (however, not by a statistically significant amount) Projections Based on the above study, Merrill Lynch's Management Science group made the following projections, assuming Supernova were adopted by 200 FAs per district (approximately 20 percent of FAs): - $130 million annual increase in FA production (with 90 percent confidence) - $6.6 million annual reduction in market errors (with 90 percent confidence) - Total: $58 million in annual pre-tax profit, requiring "some investment" to develop a supporting infrastructure (note that this projection may exclude most benefits from customer retention and word-of-mouth referral) Case 2 Merrill Lynch EXHIBIT 6 527 Merrill Lynch Financial Statements Source: Merrill Lynch. Year Ended Last Friday in December Net Revenues Commissions Principal transactions Investment banking Underwriting Strategic advisory Asset management and portfolio service fees Other 2002 2001 2000 $ 4,657 2,340 $ 5,266 3,930 $ 6,977 5,964 1,710 703 4,914 2,438 1,101 5,351 528 18,614 20,143 16 877 3.266 21,880 2,699 1,381 5,688 967 23,676 21,176 18.086 3 090 26.766 11,269 2,232 1,077 895 703 545 349 207 902 13,730 2,320 1,006 893 939 637 404 217 903 14 851 131 2.193 20.503 21 049 3,757 1,053 191 $ 2.513 $ 2,475 1,377 609 195 $ 573 $ 535 5,717 1,738 195 $ 3.784 $ 3.745 $ $ $ $ 15,075 13,178 9 645 3,533 18,608 Interest and dividend revenues Less interest expenses Net interest profit Total Net Revenues No_n-lnterest Expenses 9,426 1,741 909 727 540 552 258 Compensation and benefits Communications and technology Occupancy and related depreciation Brokerage, clearing, and exchange fees Advertising and market development Professional fees Office supplies and postage Goodwill amortization Other Research and other settlement-related expenses (Recoveries)/expenses related to September 11 Restructuring and other charges Total Non-Interest Expenses Earnings Before Income Taxes and Dividends on Preferred Securities Issued by Subsidiaries Income Tax Expense Dividends on Preferred Securities Issued by Subsidiaries Net Earnings Net Earnings Applicable to Common Stockholders Earnings Per Common Share Basic Diluted 611 291 (212) 8 $ $ 2.87 2.63 0.64 0.57 4.69 4.11 (Continued) Organizational Leverage Points Achieving change in any Merrill Lynch office required buy-in from the head of that office. That person could be thought of as an "organizational leverage point." However, according to one FA, "A lot of office managers were trained that you manage by hoping things will get better, and when they don't, by yelling at people, firing them, and hiring new ones." A Supernova office head continued: "Remember that lots o f office heads are both managers and FAs. As a result, they're competing with the people they're supposed 528 Case 2 Merrill Lynch EXHIBIT 6 Merrill Lynch Financial Statements continued Consolidated Balance Sheets (dollars in millions, except per share amounts) Assets Cash and cash equivalents Cash and securities segregated for regulatory purposes or deposited with clearing organizations Securities financing transactions Receivables under resale agreements Receivables under securities borrowed transactions Trading assets, at fair value (includes securities pledged as collateral of $11,344 in 2002 and $12,084 in 2001) Contractual agreements Corporate debt and preferred stock Mortgages, mortgage-backed, and asset-backed securities Equities and convertible debentures U.S. Government and agencies Non-U.S. governments and agencies Municipals and money markets Investment securities Other receivables Customers (net of allowance for doubtful accounts of $79 in 2002 and $81 in 2001) Brokers and dealers Interest and other Loans, notes, and mortgages (net of allowance for loan losses of $265 in 2002 and $201 in 2001) Separate account assets Equipment and Facilities (net of accumulated depreciation and amortization of $4,671 in 2002 and $4,910 in 2001) Goodwill (net of accumulated amortization of $984 in 2002 and $924 in 2001) Other assets Total Assets December 27, 2002 December 28, 2001 $ 10,211 $11,070 7,375 4,467 75,292 45,543 120,835 69,707 54 930 124,637 38,728 18,569 14,987 13,530 10, 116 10,095 5 535 111 560 31,040 19,147 11,526 18,487 12,999 6,207 5 561 104 967 81,787 87,672 2,020 3,234 35,317 8,485 10 581 54,383 39,856 6,868 8 221 54945 34,735 19,313 13,042 15,965 3,080 2,873 4,446 4454 4,071 2 478 $447,928 $435,692 to be managing--competing for space and resources in the office, and to ·a lesser degree, for clients. Every time I walk into an FA's office I know he's asking, 'Is what my manager's saying best for me--or for him?" Heads of offices who had adopted Supernova and encouraged their FAs to do the same believed that Merrill's FAs could be broken down into three groups. Twenty percent would buy into Supernova quickly and adopt it with few problems. Another Case 2 Merrill Lynch EXHIBIT 6 Merrill Lynch Financial Statements 529 concluded Consolidated Balance Sheets (dollars in millions, except per share amounts) December 27, 2002 December 28, 2001 $85,378 7 640 93.018 5,353 $74,903 12 291 87 194 5,141 81,842 85,819 45,202 14,678 7,952 6,500 4864 79 196 2,020 36,679 18,674 5,857 4,796 9 911 75 917 3,234 28,569 16,541 20.724 65.834 3,566 13,042 78.524 422,395 2,658 28,704 11,932 18 773 59 409 3,738 15,965 76 572 412,989 2,695 425 425 58 62 1,311 5,315 (570) 18,072 24186 1,283 4,209 (368) 16 150 21.336 961 775 22.450 22,875 977 776 19.583 20,008 $447,928 $ 435.692 Liabilities Securities financing transactions Payables under repurchase agreements Payables under securities loaned transactions Commercial paper and other short-term borrowings Deposits Trading liabilities, at fair value Contractual agreements U.S. Government and agencies Non-U.S. governments and agencies Corporate debt, municipals and preferred stock Equities and convertible debentures Obligation to return securities received as collateral Other payables Customers Brokers and dealers Interest and other Liabilities of insurance subsidiaries Separate accounts liabilities Long-term borrowings Total Liabilities Preferred Securities Issued by Subsidiaries Stockholders' Equity Preferred Stockholders' Equity (42,500 shares issued and outstanding, liquidation preference $10,000 per share) Common Stockholders' Equity Shares exchangeable into common stock Common stock (par value $1.33 1/3 per share; authorized: 3,000,000,000 shares; issued: 2002-983,502,078 shares and 2 0 0 1 - 962,533,498 shares) Paid-in capital Accumulated other comprehensive loss (net for tax) Retained earnings Less: Treasury stock, at cost (2002-116,211, 158 shares; 2 0 0 1 119, 059, 651 shares) Unamortized employee stock grants Total Common Stockholders' Equity Total Stockholders' Equity Total Liabilities, Preferred Securities Issued by Subsidiaries, and Stockholders' Equity I 11 I, 530 Case 2 Merrill Lynch 20 percent were unlikely to ever buy into it. The remaining 60 percent would need 60 hours of coaching over two years. Coaching often involved asking questions such as: 1. What's your financial planning process? 2. What's your investment process? 3. What's your service delivery process? 4. What's your new business-your marketing-process? Follow Up/Support To date, Supernova had been spread through road shows and other presentations. While many FAs attended those road shows, only 2,000 had completely adopted Supernova. Another 4,000 had partially adopted Supernova. These FAs posed several risks. First, they jeopardized the Supernova "brand" in that their clients would not be as satisfied as those of complete adopters. Second, Supernova advocates agreed that a failure to fully adopt the program meant that its benefits for FAs, such as improved compensation and quality of work life, would not be enjoyed. Client Expectations Many Supernova FAs believed that after clients became accustomed to Supernova, their expectations for service rose dramatically. In the words of one, "We designed Supernova to spoil them-and it does." This situation created a problem in measuring customer satisfaction when comparing non-Supernova clients with Supernova clients. It also created a problem when service promises were made to clients by FAs who intended to fully adopt Supernova, but never completely implemented the program. Changing Role of Some FAs Historically, the individual FA often made recommendations on what investments a client should make. However, many FAs in general, and most Supernova FAs, saw their role as asset gathering and allocation, leaving asset management to professional asset advisors. Supernova FAs noted that they preferred this new role because it enabled them to provide consultative service, examining risk relative to reward, as opposed to selling a product. Many traditional FAs, who wanted to continue recommending investments, associated the new approach (gathering and allocation) with Supernova. Misinterpretation Walker often received calls from FAs interested in Supernova in which they asked him for the "Supernova software," believing that if they loaded it on their computers they would be "Supernova compliant." Walker felt that these FAs saw Supernova as an exercise in implementing technology. He noted, "We've got great new CRM software, the best out there. It will make good Supernova FAs even better. But it's only one piece of a complex solution." Metrics Both Supernova FAs and managers believed there was a problem with metrics, one noting: "We don't get paid as well for a lot of the new things we're selling under Supernova, like mortgages and insurance, despite their better profitability for the firm." FA Nature FAs valued their independence. According to a senior manager, "They don't want to walk in lock step. They like autonomy. Anything that looks like a requirement from a centralized authority is usually rejected out of hand, or at least fought vigorously." Inclusion of Client Associates Even though client associates were essential to Supernova's working effectively, most FAs made the decision to adopt it, or not, without involving their administrative assistants. Case 2 Merrill Lynch 531 Exhibit 7 presents excerpts from an FA's presentation on Supernova. Exhibit 8 illustrates portions of the contents of a folder. CONCLUSION A Supernova FA commented: "Historically, when we sold a product to a client, Merrill Lynch made money and the FA made money. Supernova helps to solve the dilemma that created. Supernova enables us to earn our money for handholding, and to do it really well. It provides a business process-not a product. We've never had that before." EXHIBIT 7 Excerpts from FA's Presentation on Supernova Source: Company documents. Life before Supernova Constant Intenuptions! Disorganized & Reactive! Phones ringing off the hook! !! Instant client bonding! Stopped two transfer outs! Record Month of Production! One million dollar client referral! Dr. returns 4.5 million back to Merrill Lynch! Life after Supernova No more Interruptions! Organized & Proactive! FA's making 300 proactive calls per month! CA is now in charge!! 532 Case 2 Merrill Lynch EXHIBIT 8 Portions of a Folder's Contents Source: Company documents. PROJECT SUPERNOVA (12-4-2 The illtimate Client Experience) 1.) 8 Outgoing Calls: Outgoing call to client was placed. Action Plan Proposal Report was reviewed and updated. Client portfolio was checked and reviewed. Client Performance was checked and reviewed. 2.) 2 Quarterly Phone Reviews: Quarterly review call was placed. Action Plan Proposal Report was reviewed and updated. Market overview given to client. Client Portfolio was checked and reviewed. Client Performance was checked and reviewed. 3.) 2 Face to Face Reviews: lli_ lli_ lli_ lli_ lli_ lli_ lli_ Financial Foundation & IFF completed and updated. Reconfirm Financial goals and risk tolerance. Review Client performance vs. Goals. Review client portfolio for necessary adjustments. Introduce client to services they do not have. Smart Market (ASK FOR ADVICE.) Complete service questionnaire & schedule next appointment. Case 2 Merri// Lynch EXHIBIT 8 Portions of a Folder's Contents 533 continued C L I E N T ACTION PLAN Client Name: Performance Need: _ _ _ _ _ Performance Want: _ _ _ _ _ _ _ Risk Tolerance: _ _ _ _ Profile Score: _ _ _ _ _ _ _ Time Horizon: _ _ _ _ Allocation Type: _ _ _ _ _ BOSAR Investment Assets: Cash Flow Control: Discussed Who Done Discussed Who Done Discussed Who Done Discussed Who .Done Discussed Who Done CMAAccount Visa Signature Card Merrill Lynch Online MLUA Stocks/Equities: Consults Strategy Power MFA Annuities Bonds/Fixed Income: Municipal Bonds Taxable Bonds CD's Asset Allocation: Reviewed Asset Allocation Portfolio Re-balanced Retirement: IRA's: Client #1 IRA Contribution Client #2 IRA Contribution (Continued) 534 Case 2 Merrill Lynch EXHIBIT 8 Portions of a Folder's Contents continued 401K's: Discussed Who Done Discussed Who Done Discussed Who Done Discussed Who Done Client #1 Contribution Reviewed Client #1 Portfolio Allocation Reviewed Client #2 Contribution Reviewed Client #2 Portfolio Allocation Reviewed Rollover from Job Transition Net Worth: Liability Management: Our Rate Client Rate Omega Mortgage Home Equity Commercial Loan Consumer Debt Tax Planning: Tax Reduction Strategies: Client Tax Information Taxable Equivalent Yield Client Tax Rate = Year End Tax Wash Selling Education Planning: Education Planning Strategies: UGMA/UTMA Accounts 529 Account Funding Case 2 MerrillLynch 535 EXHIBIT 8 Portions of a Folder's Contents continued Survivor Protection: Life Insurance Established: Discussed Who Done Client #1 Insured vs. Needs Client #2 Insured vs. Needs Income & Asset Protection: Income Protection: Client #1 Disability Insurance in Place Client #2 Disability Insurance in Place Asset Protection: Long Term Care Insurance Personal Excess Liability Insurance in Place Home Owners Insurance Reviewed Estate Planning: Estate Planning issues: Wills Updated and Reviewed Living Trust Established Assets and Accounts Re-titled for Trust Beneficiaries Reviewed Transfer On Death Completed Providing for each Other: Appoint Guardian for Minor Children Durable Power of Attorney Appointed Health Care Provider Appointed Business Buy-Sell Agreement in Place Wealth Replacement: Wealth Replacement Trust Wealth Replacement Insurance (Continued) 536 Case 2 Merrill Lynch EXHIBIT 8 Portions of a Folder's Contents concluded BE HUMAN! I.) Client 1's Career: Client 2's Career: II. Client 1's Hobbies: Cliennt 2's Hobbies: Ill. Client 1's Passions: Client 2's Passions: My suggestion is that Merrill Lynch fully adopts Supernova to improve client satisfaction uniformly. FA's will increase their income by contacting their clients more often and according to a study performed clients will also benefit by "show[ing] positive effects on saving behavior from a financial advisory meeting" (Hermansson C., 2016). Many FA that adopted Supernova complained of client expectations rising, but I believe these expectations can be taken as feedback on how to improve their service further. In a competitive market, these expectations should not be overlooked but utilized. References Hermansson, C., & Song, H. (2016). Financial advisory services meetings and their impact on saving behavior - A difference-in-difference analysis. Journal Of Retailing And Consumer Services, 30131-139. Retrieved from url= direct=true&db=edselp&AN=S0969698916300248&site=eds-live Merrill Lynch has been very successful, but they now need to get all their offices to adopt the Supernova program to deliver consistently exceptional service in which all their clients have relatively the same experiences. All the offices also need to completely adopt the program to ensure the brand of Supernova is not jeopardized and to eliminate the issue of clients receiving service promises from FAs who did. Although there have been many satisfied FAs with the Supernova program, there is the concern of not being compensated fairly for the added tasks and products being sold under Supernova. I think Merrill Lynch needs to address these concerns to increase the likelihood of their FAs adopting Supernova. According to Rahman Malik, Butt, and Jin Nam (2015) "organizations offer various types of rewards to employees to enhance their performance. The effectiveness of rewards in influencing employee performance is critical because it affects the achievement of organizational goals. Despite the importance of rewards and their widespread use in organizations, empirical evidence supporting the effectiveness of rewards is at best mixed” (p. 59). Therefore, I think Merrill Lynch needs to increase their intrinsic and extrinsic rewards to achieve their goal of fully adopting the Supernova program. Supernova was created to give customers the "ultimate client experience" and when used effectively it does just that. Building relationships and trust are among the most important aspects of Supernova as getting to know your clients needs and wants makes a FA's job that much easier. Through this relationship building there are many perks. The FA's benefit in two different ways, they have clients referred to them by existing clients, and existing clients want to stay with them because of the interest that they take in their life. This is referred to as attack and defend. "Exceptional client service builds comfort, and comfort leads to intimacy" (Knapp, 2008), and by creating this intimacy, you will "build a force field around your clients that quickly wards off any competitive approaches or firms" (Knapp, 2008). Both being on the attack with getting referral clients and on the defense with retaining those clients FA's have put so much time and effort in with are both huge aspects of Supernova. Which of the two do you think is more important to managing a successful client list? References: Knapp, R. (2008). The Supernova Advisor: Crossing the Invisible Bridge to Exceptional Client Service and Consistent Growth. Hoboken, N.J.: Wiley.
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