Merrill Lynch’s brokerage call centers, its service centers for less complicated and less profitable accounts, are under investigation by the NASD for past improprieties.
According to a Wall Street Journal report, the regulator’s probe focuses on the firm’s alleged failure to supervise some of its brokers working at call centers in Jacksonville, Fla., and Hopewell, N.J. As a result of the failures, reps working at the centers between 2001 and 2002 chose to put clients in often-unsuitable investments in attempts to make more money on them.
The NASD would not comment on the matter, but Merrill spokesperson Mark Herr says the alleged problems have been remedied: “After 2001, Merrill Lynch’s advisory center, known to Merrill Lynch clients as the Financial Advisory Center (FAC), experienced rapid growth, and, in retrospect, suffered some growing pains. Over the last four years we have made a series of changes to improve the operations and management of the FAC. Today the FAC provides outstanding service and a recent survey found that 86 percent of clients gave it a ‘highly satisfied’ rating.”
Merrill’s call centers houses client accounts with $100,000 or less, where, according to Merrill reps, a team of three or five people services them. Reps are encouraged to transfer accounts to the FAC in order to focus on more profitable relationships.
Merrill Lynch doesn’t disclose much information about the call centers, so facts about personnel, productivity and operations are hard to come by. But a former Merrill Lynch branch manager says between 2001 and 2002 the call centers contained more than 300 Series 7 brokers, and handled roughly 1.5 million accounts with $20 billion in client assets.
One former Merrill broker, who left the firm this year, confirms what Herr says about improvements: “We shied away from sending clients to them in the beginning because we didn’t know anything about their quality,” says the rep. “But after Stan O’Neal came on, it quickly began to look like a viable option for clients.” He also guesses that the market downturn and subsequent portfolio losses in accounts had something to do with the investigation. “Every firm at that time was chasing returns for clients,” he says.
As a component of Merrill Lynch’s segmentation strategy, the call center is an important piece, allowing the firm to focus resources on servicing and growing its most profitable clients, the high net worth, but without losing the smaller assets altogether. While Herr says a majority of clients report satisfaction, consultants and others say only time will tell: “The jury is still out, it’s not clear that you gain anything from them yet,” says Frank Fernandez, the SIA’s chief economist. “We’re still waiting to hear from customer,s and other firms are waiting in the wings to see if firms like Merrill and others trying it will have success.”
Morgan Stanley launched its Client Advisory Centers (CAC) earlier this year, a “relationship migration approach” that is driven directly by the discretion of the FAs for accounts less than $100,000, according to a spokesperson. Wachovia also has a call center, inherited from Prudential, but it is only a “very small part of the traditional brokerage business,” says a spokesperson.
UBS and Smith Barney do not use call centers, but Smith Barney is mulling over the idea. “We’re looking at, but we have not decided what to do,” says Charlie Johnston, head of the firm’s global private client group. Johnston says he doesn’t like the idea of forcing reps to cough up sub-$100,000 accounts: “I never knew anyone who ended up with a $5 million account that didn’t grow from something much smaller,” he says. He also doesn’t like the idea of a customer not having a real relationship with a dedicated advisor. At the same time, Johnston is keen to address the wants of top producers. “We have a lot of FCs that have 400 to 500 clients but want to focus on the higher end,” he says. “So we’re going to look at ways they can do that.”
The SIA’s Fernandez says margin-compressed firms are being forced to wring profitability out of every aspect of the business, and call centers help in that effort. But he warns against compromising service: “As long as we’re a service industry, customers will demand to have immediate and consistent access to someone who’s smarter than them,” he says. “If you don’t provide that, you risk losing your customer base.”