From the November 2012 issue of Research Magazine • Subscribe!

What’s Driving Industry Shifts?

The number of wirehouse advisors and their asset base continues to drop, says a report released by Cerulli Associates on Monday. Still, it remains the largest and most dominant channel in the industry.

There were about 51,750 wirehouse reps as of year-end 2011, according to Cerulli, down from 56,900 in 2007. That’s a four-year compound annual decrease of about 2.5%. However, from 2010 to 2011, the wirehouse channel added about 700 advisors for a one-year growth rate of 1.4%. Many of these new reps most likely were hired as Merrill Edge advisors.

This year’s study, the consulting group notes, included input from 6,000 advisors across a variety of FA channels, up from 1,500 in past years. “These survey findings indicate a shifting advisor base between channels, with a lot of activity moving away from the wirehouse firms,” said Bing Waldert, director at Cerulli Associates of Boston, in a statement.

Cerulli attributes some of the cause for the shift between channels to merger activity among the large wirehouse firms—a la Morgan Stanley and Smith Barney—which has led to restructuring. Plus, the strong growth in the RIA channel has caused a shift in focus from wirehouses to RIAs.

Nonetheless, wirehouse advisors’ market share is dominant: Reps in this channel managed about 41% of total assets in 2011. This figure could drop to about 39% this year and 36.5% in 2013.

Other channels, though, have a long way to catch up to the big four: Merrill Lynch, Morgan Stanley, Wells Fargo and UBS. The regional-broker channel, for instance, controls about 16% of assets, and the independent channel (excluding dually registered reps) has about 14%. When IBD reps and dully registered advisors are combined, the total level of assets rises to 22%.

Overall, the industry has been shedding financial advisors as low producers leave the industry. It included about 316,100 in 2011, down from roughly 323,550 in 2010 and 333,250 in 2009, Cerulli says. “With independent channels maturing, there are new options competing for their assets, offering the option of ownership, while providing the necessary support services to ease transition,” the report explained. “Wirehouses need to re-think their value proposition to advisors.” 

The consulting group also explained, “Retaining the largest pool of assets by paying advisors to stay does not equate to a viable long-term strategy. Executives must refocus on a wealth management centric culture, industry leading technology, flexible employment options for their advisors, and resolve their training and hiring issues to fend off the challenges eroding their market share.”

Current Environment

Offering their views on “The Changing Advisor Landscape,” Mark Wiedman, global head of BlackRock’s iShares and Paul Hatch, vice chairman of Morgan Stanley, addressed attendees at the recent Morningstar ETF Invest 2012 conference in Chicago. Hatch promoted the idea of “rep as portfolio manager” and long-term client relationship builder, while Wiedman shared his thoughts on the inevitable changes that technology, transparency, beta exposure and price efficiencies are bringing to the advisor universe.

“The role of an advisor is far more challenging than it was 30 years ago,” said Hatch, pointing to increased regulation, single-digit returns and loads of investment products that keep pouring into the market. “The growth of the fee-based advisor over the last five years has been remarkable, and it was probably keyed off of the events of 2007 and 2008. It’s not a temporary trend, it’s a permanent change in the way advisors view themselves.”

Hatch said that today, wirehouse reps look more like the RIA community, “and it’s a good thing.” And he ventured an opinion about where advisors are headed: “I would be happy if the industry went to nothing but fee-based. It’s right for the client.”

As for the fiduciary debate, “I think it’s a lot of hot air,” said Hatch. “All of the advisors in this room who don’t think they’re a fiduciary raise your hand.” Nobody at the Radisson Blu, of course, raised a hand.

“Advisors care about their clients first. I’m all for what Congress is doing if it helps consumers, but it doesn’t help advisors because they all already think they’re fiduciaries,” he explained.

As for Wiedman, he believes that the fiduciary issue will be resolved as behavior changes along with fee structures. “I think it’s about fee structures and transparency. It’s much more important than legal structures,” Wiedman said. “If you want to know what happens to ETFs, look to what happens in the fee-based world. Wherever fee-based arises, ETFs follow.”

As Wiedman predicted a fee-based future, Hatch concluded with the thought that “the death of the wirehouse community is not upon us.” Wirehouses provide liquidity and a training role for the industry, he said, along with an important source for technological change.

“That said, the indie space will continue to grow, and to grow faster than the wirehouse community itself. They will be the innovators and I think that’s a good thing,” Hatch explained. “But anyone who thinks the wirehouse space will disintegrate is just unrealistic.”

Channel Migration

A significant number of advisors are looking for opportunities outside their current firm, and the bulk of them strongly favor two firms, according to a new report released by Cogent Research in mid-October. In terms of who is looking to move, just over two in 10 (22%) of all advisors and nearly three in 10 (29%) working for a national wirehouse are open to the idea of moving to a new firm, the research found. 

“The top three choices all offer multiple models of affiliation,” said Chip Roame, head of Tiburon Strategic Advisors, in an interview. “This is the big learning to me.”

The industry expert says he was also surprised by the number four choice, which historically has not been very popular with “successful, mid-career wirehouse reps.” (In fact, the fourth most popular choice also includes multiple channels.) 

Cogent says it interviewed more than 380 advisors, out of a total advisor population of about 316,000 (a figure tracked by Cerulli Associates). 

“In particular, the national wirehouse firms need to investigate the root causes of dissatisfaction among their current employees in order to retain top producers and prevent imminent defections,” said Meredith Lloyd Rice, senior project director and co-author of the report, in a statement. 

Of the 25 broker-dealers, the firms with the greatest number of advisors giving them high consideration are as follows: LPL Financial, 43%; Raymond James, 40%; Wells Fargo Advisors, 36%; Ameriprise Financial, 30%; and Morgan Stanley, 28%.

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