Wirehouse firms are getting hammered from every direction in the competition to attract high-net-worth investors, says a new report from the financial services industry research firm Cerulli.
While the high-net-worth market share of wirehouses slipped to 45% from a peak of 56% in 2007, and is projected to fall to 42% by 2014, both of the industry segments with which wirehouses compete in this space—traditional private client groups and multifamily offices—have momentum on their side.
In an interview with AdvisorOne, Cerulli senior analyst Robert Testa said his Boston-based firm, which has been tracking the high-net-worth market on an annual basis, has seen this trend in the making for some time, but this is the first year wirehouses have lost the No. 1 spot. The large full-service retail brokerage firms known as wirehouses, numbering just four today, include Bank of America Merrill Lynch, Morgan Stanley Smith Barney, Wells Fargo and UBS.
By year-end 2010, traditional private client groups—a class that Testa says includes whiteshoe firms like Goldman Sachs, Credit Suisse, BNY Mellon and Bessemer Trust—reached 47% of high-net-worth assets; Cerulli projects the segment’s market share will reach 49% by 2014.
Meanwhile, multifamily offices, starting from a small base, have seen the most rapid growth. These firms, many of them owned by large banking institutions but independently managed, more than doubled their assets from 2005 to 2010 and grew at an 18% rate in 2010. GenSpring (owned by SunTrust), Convergent Wealth Advisors (owned by Citi National Bank) and Hawthorn (owned by PNC) are prominent firms in the multifamily office space.
Testa said it wouldn't be easy for wirehouses to reverse a trend fueled by technology and market changes, and accelerated by the financial crisis.
“Being a wirehouse does not give you any kind intrinsic advantage,” the Cerulli analyst says. “HighTower can offer anything that a wirehouse offers.”
When the financial crisis exposed wirehouse failings in everything from auction-rate securities to non-traded REITS, “a lot of clients did reevaluate their positions and relationships,” Testa said.
With more attractive offerings in the marketplace, a key challenge for wirehouses is to retain their advisors.
“Many investors hate the firm, but love the advisor; moving away is not that easy,” says Testa, citing inertia. But clients do “prefer to follow financial advisors to other firms. “Ones that have liquidation events prefer to go into other channels,” he says. And it is the independent fiduciary firms with comprehensive offerings that are “winning” in this environment.
“Wirehouses are still pushing product. Clients want an independent and fair offering,” says Testa.
A further reason advisor retention is critical for wirehouses is that attracting new assets has become rather complicated. Testa says there is a big difference between a tech entrepreneur in the first generation of wealth and a family whose wealth derives from a steel magnate four generations ago.
“The high-net-worth space is such a complex industry. No one model is right and size does not make you successful in attracting new assets,” Testa says. The result, says the Cerulli analyst, is that firms competing for assets in this space are “becoming much more specialized.”