While the number of wirehouse advisors continues to shrink, the assumption that a large number of them are going into the independent channel is flawed, said Chip Roame, head of Tiburon Strategic Advisors during the group’s CEO Summit in San Francisco on Wednesday. “I don’t buy it,” said the consultant.
“The fact is that 12% of wirehouse and regional advisors typically move in a year, and 90% of them do so because they are fired,” he explained during a presentation on industry trends. “Of the remaining 10% who chose to leave, 70% stay within the channel that includes the wirehouse and regional firms.”
“So what are we talking about? Maybe 300 to 500 successful advisors choose to go independent each year and take between $100 billion and $200 billion with them,” said Roame. In contrast, about 5,000 wirehouse advisors were let go last year, he shares, and these brokers have about $17 million in average assets vs. the overall wirehouse average of $94 million in AUM.
Some of these fired advisors may indeed go independent. But since it is not a step they are taking of their own volition, this movement is far from the much-hyped “breakaway-broker” trend, Roame says. “Anecdotally, my understanding is that many of them become wholesalers or take similar positions within the financial-services industry,” he explained.
At Bank of America, for instance, some advisors who are being pushed out of the FA channel can move over to the Merrill Edge, BofA’s mass-affluent Web-focused channel, by working in branches or phone centers.
“Why is the breakaway shift so small? Advisors need more landing pads. They don’t want to be their own RIA,” said Roame. This situation, he adds, is helping consolidators who can handle the back-office issues, such as HighTower, and firms like Schwab.
It's also leading the wirehouses to consider ways for their captured advisors to embrace the RIA model in what he calls “halfway-house” developments. Such hybrid models could be introduced over the next few months by wirehouse firms like Morgan Stanley Smith Barney, according to Roame.
On the flipside, however, some independent advisors such as Ron Carson, are moving out of the independent broker-dealer space dominated by LPL Financial in order to have their own RIA. “There’s a lot of polarization going on these days,” Roame shared.
For the broader financial-services industry, the distribution system is generally moving toward more independent structures of all types, Roame said. This trend, along with the continued dominance of high-end advisors and expansion of self-service or partial-service investing models (like Merrill Edge) will continue to be major industry trends, he believes.
In 2005, there were 338,909 financial advisors, while in 2010, that number was down to 320,378, according to Tiburon Strategic Advisors, representing a drop of about 18,500.
There were about 62,500 wirehouse/regional advisors in ’08 and roughly 55,500 in ’10, according to the Northern California-based consultancy. The number of independent reps fell from about 104,300 in ’05 to 97,800 in ’10. But the total number of dual-registered reps or RIAs grew from 23,500 to 33,400 over that same period.
The total number of advisors–320,000–is stagnant, Roame says. “It’s ironic that it’s gone down with the markets but as Baby Boomers are getting ready to retire,” he explained. “But self-service shops have jumped in to fill the gap on the retail side, and higher-end advisors are taking more market share; it’s the 80/20 rule.”
Some of the wirehouse firms may be struggling with “strategic issues,” the consultant says, “but their advisors are still amazingly successful.
As measured by assets, the wirehouse and regional firms managed about 58% of total assets in 2010, down from 63% in ’07 but still way ahead of the independent channel–which had about 35% of industry AUM last year, Roame explains.
Follow the Money
As with the “breakaway-broker” trend, there has been a flawed generality when it comes to advisors and pricing methods, Roame notes. “Wirehouse advisors are 56% fee based and 44% commission based,” he said. Regional reps are 53% fee based and 47% commission based, while 51% of independents’ production comes from fees and the remaining 49% from commissions.
“The message to IBDs is, ‘Don’t beat this drum of fee-based focus and how special you are on this distribution point,’ ” said Roame, because the data says otherwise.