From the November 2009 issue of Research Magazine • Subscribe!

'Time for Something Real' at the Wirehouses, Says Industry Consultant

Tiburon Strategic Advisors' Chip Roame shares his views on what BofA Merrill, Morgan Stanley Smith Barney, Wells Fargo - Wachovia and UBS need to do to win more clients and more advisors.

Tiburon Strategic Advisors, led by Chip Roame, just wrapped up its 17th semi-annual Tiburon CEO Summit in mid-October in San Francisco. (It will host its 18th semi-annual event in April 2010 in New York).

This year, rather than give an overview on industry trends, Roame's group recognized two industry players as part of its inaugural Tiburon CEO Summit Awards. After the event, the consultant spoke with Research about these awards and trends affecting the wirehouse firms today.

Why did Tiburon start giving awards?

Awards given at the conference were based on two themes that I've held close to my heart for a while and have tried to promote at the CEO summits since the beginning.

The awards were based on the logic I believed in when I started Tiburon more than 10 years ago: the brokerage and investments industry, going back 100 years or more, has a history of building products and selling them. The history is not based on interviewing consumers to see what they want that most addresses their needs.

This summit focuses on consumers, includes a consumer panel and strives to get everyone in the industry focused on consumers and their needs. The award to Charles Schwab says that the company focuses on consumers, that it does lots of research and builds consumer-friendly products.

The award to Ken Fisher recognized his challenging of conventional wisdom. This industry can get caught up in myths, theories or data sets. I try to challenge such theories and so does Ken. Everything he does shouldn't work according to conventional wisdom, like his mailings, his 1-800-numbers and his use of professional sales staff.

What do you make of the so-called movement of brokers from the wirehouses (or the captive model) over to the independent model?

The wirehouses have 90,000-plus brokers. A big flow of them could be, say, 10 percent or 9,000. But that is not what is happening today. We saw about roughly 650 go independent in 2008, or about 1 percent.

Of course, recipients of this 1 percent are very pleased. It's a great trend for them.

But this doesn't mean that every wirehouse broker is going independent. Yes, some big, successful brokers are going independent. It is not decimating the wirehouses; that is taking it too far.

Can leaders like Sallie Krawcheck at Merrill, and perhaps Bob McCann at UBS, rebuild the wirehouse brands?

They have certain capabilities, skill sets, brands and other qualities that could allow them to win right now. To say that the wirehouse model or the captive model is the future is taking it too far, I'd say.

But they do have a great brand and a lot of productive brokers who, frankly, don't want to go independent. They have a lot working for them.

Culturally, though, they are getting it all wrong. They are trying to maintain control and haven't grasped yet that consumers are free agents, and brokers are, too. So, if you create the best environment for those brokers and their clients, you will win.

The vast majority of brokers do not want to go independent. Again, if you can create the right environment for them, you will win.

Leaders like Sallie Krawcheck and Bob McCann can still win. They can retain all their brokers, grow their firms and be fabulously successful wirehouses.

But will they? I need to see some proof that someone actually gets this (i.e., the need to create the right environment for both brokers and clients). I don't see anyone doing so right now. I see them maintaining the old ways. And the old way is gone; it's time to move on.

The reason there is a flow away from the wirehouses is that they don't get this, and that's been the case for a decade or so. Thus, the independent channel has emerged because of this.

Still, it doesn't mean the new leaders don't have a chance. They do. But they have to do more than make pronouncements. It's time to do something real.

Is this the situation for the four remaining wirehouses?

This is generally true for all four wirehouse firms, Merrill Lynch, UBS, Wells Fargo and Morgan Stanley.

Now, Morgan Stanley has done some interesting things, by lifting out the Smith Barney business and betting on James Gorman. This sends the message that, "We are the home for brokers who want to work in an investment-banking setting."

This is not necessarily enough, but it is admirable and clearly says who they are.

What are the major issues or trends that will affect the future of the wirehouses?

The first is does this flow to independence gain momentum? In other words, for the wirehouses, the question to ask is, are those advisors and assets that you've lost influencing a whole generation, a whole group that looks up to those going independent?

Your problem is not that the there are a few horses out of the stable but that these horses are being watched by all the ponies.

Second, are the wirehouses done sorting themselves out culturally? Are they settled? If not, they need to be settled in a few months, not a few years. If a firm feels like it's in play, then you have to wonder. That's like walking on eggshells for an advisor.

Third, will any of them really innovate? For instance, will they make themselves fully transparent to their clients and will they be seamless in giving advisors a truly independent option. I believe that regardless of what the SEC says, for instance, all brokers should be treated as fiduciaries. Will any of the firms take this step before they are required to? If I were an advisor, I'd be impressed by the firm that takes the bold step towards consumer orientation.

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