May 20, 2011

Wirehouse Model ‘Strikes Back,’ Says FRC Analyst

In terms of total assets under management, BofA-Merrill, Morgan Stanley, Wells Fargo and UBS top $4.5 trillion

When it comes to gathering, managing and holding assets, the four wirehouse firms are “striking back,” according to the author of a recent Financial Research Corp. study on the four largest broker-dealers.

“The wirehouses strike back – that’s my running title for the report,” said Robert Martorana, CFA, (left) in an interview on Thursday. “Everyone is bearish on them, and they are taking hits from regulators, RIAs, etc. But they are turning the battleship around, and their gatekeepers are doing a good job, in my view.”

Earlier this week, for instance, former UBS chief Joseph Grano said the wirehouses had “lost their way” before, during and after the financial crisis due to the over-leveraging of their books and practice of pushing advisors to sell proprietary products.

In Martorana’s view, however, platform executives and other staff at the wirehouses are embracing the objectivity and open architecture of the fee-based, RIA model – because they have no choice. “RIAs, for instance, have been taking [market] share via objectivity and open architecture as their real selling points,” he explained. “But they don’t have a lock on this, and the wirehouses know they have to do more of this fee-based work to survive.”

Morgan Stanley Leads the Wirehouse Pack One competitive strategy being taken by the wirehouses is having advisors act more as portfolio managers. “This is very popular, and it saved some clients by moving assets more into cash in the crisis,” the FRC analyst said. “It’s about allowing the advisors to not give up freedom and control over asset allocation” by giving them more than the standard “portfolio buckets” or models to work with, he added.

Though, generally speaking, the wirehouses prefer a model-based approach to constructing client portfolios, the “rep as PM” is “a solution that is gradually increasing in popularity,” Martorana wrote in his April report on the wirehouses. The wirehouse can build many portfolio models – “hundreds, in fact – that could include any reasonable permutation requested by advisors,” he added.

“With a vast array of portfolio choices, incorporating proprietary and non-proprietary products, advisors can stay in charge of the managing their client’s money, allowing the advisors to build their books of business by making investment recommendations,” Martorana concluded in “Re-Evaluating The Wirehouse Opportunity: Gatekeeper, Asset Manager, and Advisor,” published by FRC in April.

According to FRC, there are about 370,000 financial advisors nationwide, with 55,525 at the four wirehouse firms.  The wirehouse FAs represent about 15% of the total advisor population today, but FRC projects this figure could rise to 15.2% by 2014.

Bank of America-Merrill Lynch executive Sallie Krawcheck (left) described the continued popularity of the traditional wealth-management firms (vs. independents) at a conference earlier this month. “Last year, we didn’t lose thousands of advisors to the independents, we didn’t lose hundreds; we lost 36, and we hired 25, so [that’s] a net loss of 11,” Krawcheck said. “And on client flows from those losses and hires, we were positive.”

In 2006, wirehouse advisors managed about $2 trillion, or one-third, of the $6 trillion is total assets being custodied or managed at the wirehouse firms. In 2010, FRC says, the wirehouse advisors were managing $4.5 trillion –- or slightly more than one-half -- of the $8.5 trillion in custody or management at these four firms.  

“Yes, it is fair to say that the wirehouses still dwarf the other channels,” Martorana said in an interview. “They may not dominate the other channels in mutual-fund flows, but they do in assets.”

The prediction of the “death of the wirehouse model” during and after the financial crisis is off base, the analyst says. “Would they just sit there and take it? No, they’ve adopted,” said Martorana. “These advisors can be fee based with open architecture and have a frightening amount of resources and brands.”

Given the level of assets at the four wirehouse firms, these trends represent a powerful competitive advantage for them, he concludes.

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