April 19, 2011

BofA, Morgan Stanley, Wells Fargo Battle to Regain Business Lost to RIAs: FRC Study

Wirehouses are changing risk control, portfolio management to recapture wealth market share

Wirehouses are working to regain lost market share by making major changes in the way they work with advisors, asset managers and investors, according to a research study just released Tuesday by Boston-based financial services consulting firm Financial Research Group (FRC).

The study conducted over the first quarter of 2011, “Re‐Evaluating the Wirehouse Opportunity: Gatekeeper, Asset Manager, and Advisor Insights, showed that wirehouses were pursuing “ transformative initiatives” after being battered by the credit crisis in 2008‐2009 and losing market share to registered investment advisors (RIAs) and regional brokers.

FRC’s study is based on a series of exclusive interviews with decision makers at each of the wirehouse firms—including Bank of America, Morgan Stanley and Wells Fargo—who are responsible for selection of third‐party fund managers and the construction of model portfolios.

“Conventional thinking has been bearish on the wirehouse industry, since they have been battered by bankruptcies and bailouts,” said Robert Martorana, author of the FRC study, in a statement. “But the outlook is brightening, as the wirehouses are reinventing their advisor strategies and portfolio construction to gain a bigger slice of the wealth management business.”

In BofA’s first-quarter 2011 earnings release on April 15, the bank’s wealth-management outlook did indeed appear brighter as higher asset management fees from the Merrill Lynch unit and investment banking fees as well as lower credit costs and gains from equity investments positively affected results. Morgan Stanley and Wells Fargo are scheduled to report earnings on Wednesday.

FRC also conducted interviews with representatives of asset management firms after conducting the wirehouse interviews. The study also incorporates input from financial advisors from FRC’s Advisor Insight Series reports, as well as public company data from each of the wirehouses.

The study showed that plans unfolding at the wirehouses include:

  • Revised roles played by advisors and new approaches to client development
  • An increased emphasis placed on risk control and more sophisticated portfolio management in relationships with retail customers
  • Greater opportunities for asset managers to distribute products through the wirehouse channel

 “Wirehouses are reprioritizing the criteria they use to evaluate new asset management firms, and they are also reprioritizing the criteria for retaining relationships with these firms. It’s not always what you’d expect, since the industry is evolving rapidly,” Martorana said.

“It’s a big mistake to underestimate the wirehouses. They have strong brands, wide access to product providers, and substantial resources for investment research. As these firms reconfigure their value propositions, they are going to surprise product providers with their ability to gather assets.”

The wirehouse firms in aggregate control $4.6 trillion in assets under management, according to FRC.

Read about FRC research on the sub-advisory market at AdvisorOne.com.

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