The Bull Whisperer

On a slushy January morning in New York City, Sallie Krawcheck sits at a marble-top table in her corner office on the 50th floor of the Bank of America tower, the second-tallest skyscraper in town. Although pedestrians far below are dodging icy splashes from passing cabs and buses, the head of Bank of America's (BAC) Global Wealth and Investment Management division isn't dressed for stormy weather. Her cream cardigan is thrown over a light print dress, and her chin-length hair is tucked behind one ear, exposing a large diamond earring. In a few hours, she'll be hosting a charity fundraiser on Park Avenue; for now, she's arguing that there's no better place for the clients and advisers of Merrill Lynch—the world's most profitable brokerage—than Bank of America, the embattled retail giant that swallowed Merrill during the crisis of September 2008.

"In the days and weeks after I got here, it hit me like a blast furnace: The client comes first," says Krawcheck, who's been running the wealth unit for nearly two years. "We operate in the client's interest. We measure client satisfaction down to the adviser level." She's so on-message that you have to remind yourself that this is the same person who, as an analyst covering Wall Street a decade ago, told a Fortune reporter she could tell when management was lying because "their lips move."

As the boss of 15,500 financial advisers at Merrill Lynch and 2,200 more at U.S. Trust, Krawcheck, 46, may be the most powerful woman on Wall Street. In the past two years her division—one of the best performers inside Charlotte (N.C.)-based Bank of America—produced $3.1 billion in profits and pushed client balances to $2.2 trillion while riding a bull market that has seen stocks double from their 2009 lows. Shares of BofA have gone nowhere since the Merrill deal closed in early 2009.

Krawcheck's performance is a rebuttal to those who argue that Bank of America got suckered when it paid $50 billion for Merrill. It was a "crazy price," Warren Buffett told the Financial Crisis Inquiry Commission last May, because Ken Lewis, BofA's chief executive officer at the time, "could have bought them the next day for nothing because Merrill was going to go when Lehman went." Lewis tried to cancel the deal weeks before it closed, saying that Merrill—which posted a $15.3 billion loss in its final quarter of independence—was in worse shape than his team had known. Regulators instructed him to proceed because Merrill's failure would threaten economic stability, he told analysts in 2009. The acquisition forced him to seek $20 billion in federal bailout money on top of the combined $25 billion Bank of America and Merrill had already borrowed. Since then BofA, which also bought subprime home loan giant Countrywide during the bust, has racked up $25 billion in mortgage and credit-card losses. In 2009, it repaid the $45 billion in rescue loans.

Krawcheck betrays no doubts about the wisdom of the acquisition. "The deal has made tremendous sense strategically," she says. "Will the business over time do better? We certainly hope and expect so." The key to making the marriage work lies in what the industry calls "cross-selling"—driving business between the wealth management, consumer banking, and commercial banking divisions. A Merrill client, for example, may shift his company's 401(k) plan to BofA's retirement unit, or open a personal line of credit at the retail bank. Bank of America management tracks the number of leads and referrals—for products such as mortgages, credit cards, and debt financing—that come from each of the firm's brokers.

Creating those synergies would be easier if Merrill's brokers—its so-called Thundering Herd—weren't independent operators, with their own clients and profit-and-loss statements. Krawcheck must draw profitable cross-sell opportunities from them without driving them away. "A good part of our growth potential," she says, "is directly linked to our connectivity to the bank." Many of the seven current and former Merrill brokers interviewed for this article, most of whom did not want to be named for fear of undermining their relationship with Bank of America, say they resent the loss of control the new centralized sales culture has created. In the two years since BofA acquired Merrill, the combined firms' broker count has dropped from 18,000 to 15,500. Most of the losses came during and right after the crash.

"Management is not in tune with the brokers," says Carri Degenhardt-Burke, a headhunter who runs Degenhardt Consulting. Over half of her 230 placements in the last two years came from Merrill, she says. "They're pushing them to cross-sell and to move accounts." She adds that half of her incoming calls are from Merrill brokers interested in the big signing bonuses being paid out by rivals UBS (UBS) and Morgan Stanley Smith Barney (MS). "Sallie Krawcheck has a really tough job," Degenhardt-Burke says. "The hardest, I think, of anyone on Wall Street. The BofA and Merrill cultures just don't mesh well."

Krawcheck cringes at the mention of cross-selling. "There are certain things that drive me nuts," she says, rolling her eyes. "'Cross-sell' is one of them. The other is 'retail distribution.' That means we're thinking about pushing product through the channel. We avoid these words internally." Yet she proudly offers examples of business from her brokers funneled to the commercial and consumer divisions, and brags about how each of BofA's 18,000 ATMs can transfer money in and out of Merrill brokerage accounts. Her unit's $42 billion in deposit growth over the last year—it now holds $266 billion in cash and cash equivalents—makes it a large bank in its own right. "If we were pulled out of Bank of America," she says, "we'd be either the top four or top five bank by deposits in the U.S. We're neck-and-neck with Citigroup (C) for being the No. 4 bank."

There's a special satisfaction in that. Krawcheck worked for Citigroup before BofA—and her six years there did not end well. Bank of America represents her second chance to show that she is up to running a global financial-services giant.

A familiar face on the cover of business magazines since her days as chairman and CEO of research boutique Sanford C. Bernstein (AB) in 2001 and 2002 (she'd been a star bank analyst there since 1994), Krawcheck had a reputation for integrity. After she questioned deal valuations and putative synergies during the boom in bank mergers, Fortune dubbed her "the last honest analyst." Then Citigroup CEO Sanford Weill, the architect of Citi's late-1990s "financial supermarket" merger binge, hired her to restore the reputation of his Salomon Smith Barney brokerage unit, which had been tainted by its boosterish tech research and involvement in the Enron accounting scandal. Two years later, after Charles O. Prince III took over for Weill, he promoted Krawcheck to chief financial officer of Citigroup—the top numbers executive for what was then the world's largest financial institution. People on the Street soon began to whisper that she was out of her depth.

Investors such as Bill Smith of SAM Advisors criticized Krawcheck for failing to control spending. And like most other big bank executives, she failed to recognize the gathering storm of risk and overleverage. In 2006, as Citigroup expanded its balance sheet, she told an interviewer that "the consumer doesn't seem stretched." By the next year, the press was reporting that she was unhappy and thinking of resigning. When Prince moved her out of the CFO job and put her in charge of wealth management, including Smith Barney and private banking, she conceded: "I'm looking forward to returning to an operating role. ... One of our most important strategic priorities is to grow this business and have it work more closely with our other businesses."

It didn't happen. By the end of 2007, Citigroup's financial supermarket dreams were dying as the bank wrote down tens of billions of dollars in bad subprime debt. Prince was out, Vikram Pandit was in. The crash chewed up the nest eggs of the wealth management unit's clients as Citi hedge funds that had bought subprime securities plunged in value. Krawcheck told Pandit that it was Citi's responsibility to reimburse the clients, according to a person with direct knowledge of the encounter, and Pandit refused. (A Citigroup spokeswoman declined comment.) Krawcheck left Citi shortly after Lehman collapsed in September 2008. Less than a year later she joined Bank of America. She declined to comment on her years at Citi or on whether her exit negotiations included a non-disparagement agreement.

For much of the 20th century, Merrill Lynch Pierce Fenner & Smith was the quintessential American brokerage, the one that brought stocks and investor education to Main Street. Merrill was independent for 94 years, until its investment bank's subprime mortgage bets crippled the firm and forced it into the arms of BofA. Formerly NationsBank, Bank of America had been built during the 1990s and 2000s through the serial acquisitions of CEO Hugh McColl Jr. and his successor Lewis, who snapped up a half-dozen financial houses—including MBNA, Fleet, and LaSalle—between 2001 and his exit in 2009. Lewis's $130 billion in takeovers made BofA the largest retail debit-card issuer and mortgage servicer in the U.S, with $1 trillion on deposit.

Brokers Jason Purinton and Kent Rains were a typical team at Merrill, 5- and 13-year veterans, respectively, who worked in the Kansas City suburb of Leawood. They left Merrill last May, taking with them $56 million in client assets, because they say they were frustrated with meddling from above. Today they're part of a new brokerage called Cetera, with 4,700 advisers and $80 billion in assets. "There was pressure to get rid of smaller accounts regardless of what potential they may hold—and corporate objectives that were in contrast to what we wanted," says Purinton, alluding to a move by Merrill to funnel low-net-worth clients into an online service called Merrill Edge. "You can't just tell a client they're too small and then, once they have money, expect to go back to them." The team has since increased its asset base to $105 million and expects to reach $150 million by the end of 2012. "We're not tied to any one fund family or product," says Purinton. "We have 100 percent autonomy and discretion to pick the clients we want."

"We're hearing from Merrill guys in record numbers," says Brian S. Hamburger, an attorney who runs MarketCounsel, an Englewood (N.J.) firm that helps brokers with the fiduciary details of leaving their employers. "They've got to answer for the sins of BofA, with clients starting meetings by asking about BofA's problems. It's bad enough that you have to live and die by the market. But to have your own firm's brand work against you..."

Krawcheck agrees that headhunters, the new crop of independent wealth management boutiques, and long-standing rivals such as Morgan Stanley are all keen to poach Merrill brokers. (Morgan Stanley acquired Smith Barney in 2009—passing Merrill as the nation's largest brokerage by head count—and is now run by James Gorman, who previously ran Merrill's brokerage force.) Yet Krawcheck insists that reports of an exodus are greatly exaggerated. She says her unit's attrition rate has been running at 10 percent, below the four-year average of 14 percent. And during a conference call with reporters in January, she said departures among the most profitable 40 percent of her brokers were at a record low. "Despite what I read about these big attrition rates" she said, "it's not happening." Fred St Laurent, an Atlanta-based headhunter, says Krawcheck's competitive drive is making the task of poaching from Merrill more difficult. "She is," he says, "a recruiter's worst nightmare."

Elliot Weissbluth, head of independent boutique HighTower, in Chicago, says Merrill represents the single top source of interest in joining his startup, which targets advisers with at least $300 million in client assets. "The whole concept of cross-selling between a North Carolina bank and Wall Street brokerage works elegantly on a spreadsheet," he says. "But a Merrill adviser ultimately rails against the idea that he needs to push BofA products." Weissbluth says he has been booking conference rooms across the country to receive Merrill brokers. "Any reasonable Merrill manager knows his people are looking around."

Krawcheck is dismissive of the independents, who she says accounted for just 0.2 percent of Merrill defections last year. "That almost rounds to zero," she says. Since brokers aren't a sentimental bunch, she isn't relying on loyalty to stem departures. In a February internal document from U.S. Trust management obtained by Bloomberg News, brokers at the unit were told that those who chose to exit would be barred from contacting clients for eight months. "Your employment is further conditioned upon your agreeing" to the terms of the letter. "Should you not comply with these terms, you agree that the company shall have the right to enforce them" through court-ordered actions. All of which makes it risky and expensive to move accounts to a rival. "They're sending the message, 'Make no mistake, you will incur our wrath, this is not a place you want to leave,'" says Mindy Diamond, president of Diamond Consultants, an executive search firm in Chester, N.J. "I think this could backfire if people view it as draconian."

Another flash point is Merrill Edge, the combination call center and online platform designed for clients worth $250,000 or less. Now that brokers are being urged to move low-net-worth clients to Merrill Edge, it means they give up some future fees along with day-to-day client contact. Lyle LaMothe, who heads U.S. wealth management for Merrill, says the move is designed to give brokers the freedom to concentrate on their key customers. "If an adviser is so busy that everything's on autopilot, if there's not a degree of ongoing communication, the client will feel shorted," says LaMothe, surrounded by pewter bulls in his office at Merrill's headquarters, just west of New York's former World Trade Center. "If you want to deliver a full-service experience, you get somewhere in the neighborhood of a couple hundred relationships. That's all you can do properly."

To lure customers to Merrill Edge, Bank of America recently started testing videoconferencing kiosks at bank branches in the Los Angeles and Washington, D.C., areas. Merrill associates in Arizona, Florida, and New Jersey dispense financial advice on the kiosks' monitors. Branches advertise Merrill Edge on their windows and ATMs, which doesn't sit well with brokers who don't like seeing the Merrill brand diluted. In a December 2009 internal memo aimed at dispelling fears over the integration of the banking and brokerage operations, Krawcheck had to declare: "No, we're not converting our wealth management branches into ATMs."

Many brokers interviewed for this story say BofA needs Merrill more than Merrill needs BofA. In the past two years, shares of investment banks such as Goldman Sachs (GS) and Morgan Stanley have far outperformed Bank of America. Where BofA called the shots during the crisis, it is Merrill's brokers and investment bankers who are profitable now.

Bank of America management is happy to have them. David Darnell, who runs the commercial banking division, says he has "waited 30 years" to work with a brokerage like Merrill. "I'd always heard about the Thundering Herd, but now I know what the herd is, and it's a powerful team."

Darnell, 58, has been at Bank of America since the late '70s, when it was North Carolina National Bank. In the past two years, he says, his division has tallied 10,000 referrals from brokers. "If I'm a client of a financial adviser and have a great relationship with the FA, the strength of that relationship transfers over. ... It is not cross-selling." Andy Sieg, head of Merrill's retirement services arm, says his unit won $3.6 billion in business from clients of Darnell's commercial bank unit in 2010, up from $700 million in 2009. Late last year, the company snatched Aecom Technology's (ACM) $1.7 billion 401(k) plan from Fidelity after BofA CEO Brian Moynihan called executives of the L.A.-based engineering and construction firm. "They wanted to understand from the top how committed we were," says Sieg, whom Krawcheck brought in from Citigroup in 2009.

Some brokers appreciate these cross-divisional capabilities. Jeff Erdmann, a financial adviser in Greenwich, Conn., who has been with Merrill Lynch for 27 years, says his $4 billion book benefits from Bank of America's lending power. In November a client asked Erdmann for help financing the purchase of a $43 million private jet. "For the first time in my career," he says, "I was able to call an aviation specialist at my own firm and arrange a deal in five days."

In December, Todd Thomson, Krawcheck's predecessor atop Citigroup's wealth management business, lured away Michael Brown, one of Bank of America's's top high-net-worth advisers, to join his startup Dynasty Financial Partners. Brown managed $5.9 billion when he left Bank of America, according to a person briefed on his move. "Want to guess how much he's taken out of his $5.9 billion?" asks Krawcheck. "I'm sure he'll take, you know, a billion dollars. Clients are allowed to go."

Shirl Penney, CEO of Dynasty, says he's "very confident" that Brown's clients will come. "For a firm with over $1.5 trillion in assets, it is easy to claim that the loss of any individual's business is insignificant," he says. "When more and more advisers and assets move to [our] model, the overall impact will be significant and not easy to dismiss."

"What do they have going for them?" says Krawcheck. "They say, 'We're independent, we're fiduciaries' "—meaning they agree to place the client's interests above the firm's. "We said, 'We'll be fiduciaries too. Sign us up!' They just conceded any competitive advantage." Of course, the fiduciary standard is just one factor brokers consider in deciding whether to jump ship. According to Diamond, some brokers are offered packages worth up to 350 percent of their 12-month revenue.

For retaining brokers over the long term, the metric that matters most is the financial health of Bank of America. "The clock is clearly ticking," says Tony Plath, a finance professor at the University of North Carolina at Charlotte. "If they don't find a way to get earnings per share higher ... . how long will his shareholders be complacent?" Plath gives CEO Moynihan "a year or two to turn it around" amid multiple obstacles, many stemming from Lewis's acquisition of mortgage lender Countrywide. BofA is spending billions to repurchase its defective loans, while fending off lawsuits from those who bought or insured the assets. Larry Dirita, a spokesman for Moynihan, says shareholder value "depends in part on aggressively cleaning up legacy mortgage issues" as well as on the synergies from the integration of Merrill and Bank of America.

"Every day that Bank of America trades [this low] is another day closer to pressure starting to form from big shareholders and Wall Street to break the thing up," says Greg Donaldson, chairman of Donaldson Capital Management, an investment firm based in Evansville, Ind., that holds Bank of America shares. "You win if Moynihan can pull everybody together and execute. You also win if he doesn't, because if he doesn't it swirls out of control and they break the thing up." While Bank of America has a market value of $142 billion, a breakup would unlock far greater value, according to Richard Bove, a veteran analyst at Stamford (Conn.)-based Rochdale Securities. "If one were to value the multiple businesses of Bank of America based on [individual unit] values, it would be worth $53 per share," he says. The stock now trades at $14.

All of which makes you wonder what vintage-2002 Sallie Krawcheck, the last honest Wall Street analyst, would have to say about Merrill being worth more as a spinoff. She wins either way—as a star in the BofA empire or as the CEO of a stand-alone Merrill brokerage. She has no doubt crunched the numbers and fielded the question from both her brokers and those she is recruiting. Krawcheck knows it's an inevitable query, and she betrays a small smile and leans forward to answer it—until one of her corporate PR people objects to the question and cuts her off.

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