They’ve added fee structures, financial planning, and a glitzy drive toward an all-under-one-roof service umbrella in the hope of attracting the asset-laden client. They’ve advertised heavily about how impartial their advice is, and how much they care about the client. They’re wirehouses; they’re after your clients; and they’re a steamrolling juggernaut impossible to stop.
Or are they?
Well, yes to the first two, anyway. The third is probably true, too, although in a way that you might not have expected.
Wirehouses, long known for their drive to sell, and sell, and sell proprietary products, have long been an easy target for the independent advisor. Their image certainly hasn’t been improved by the bear market and the recent scandals that showed how the investment banking and investment advisory sides of the big Wall Street firms were in cahoots. Still, it remains common among independent advisors to fear that Merrill Lynch or Smith Barney or any of the other wirehouses may gobble up their clientele.
Since clients do tend to migrate when they’re unhappy, and there have been some very unhappy people in the last three years, you might think that if ever there were a time for that fear to be tested, it would be now. There have, in fact, been some client losses to wirehouses, according to Ramy Shaalan, vice president of AdvisorBenchmarking.com, the unit of Rydex Funds that has for years conducted best-practices surveys of hundreds of RIAs.
“More [independent] firms are losing clients to full-service brokers over the past few years,” says Shaalan. “Compared to 2000, that number has doubled; where before it was only 10%, now it’s 23%” of the firms in his surveys who report losing clients to full-service brokers. However, he goes on to say that the numbers of lost clients are “not quantifiable” in that the observer can’t tell among that 23% whether they are advisors who have lost only one client to a wirehouse, or all their clients, or some number in between.
While “not quantifiable” numbers may sound like an oxymoron, Matt McGinness, associate director at Cerulli Associates, the Boston-based financial industry research and consulting firm, concurs. “It’s hard to judge which way the momentum is going. Nobody gives you data on the average assets per advisor and how much they’ve grown, so it’s difficult to pin down the extent to which one channel is gaining ground on another.”
And, Shaalan adds, AdvisorBenchmarking statistics show RIA firms last year grew their client base by 22%. “That’s one,” he says, ticking off yet more reasons to question the numbers. “Two is that we know part of that 22% [growth] came from do-it-yourselfers and other advisors, and a big chunk came from wirehouses. While we can’t hammer down an exact figure, the anecdotal evidence in conjunction with some of these figures is that [independent advisors] are not losing that many clients.” Only one out of four respondents to the AdvisorBenchmarking survey, he says, report losing any clients, and on a net basis they’re attracting more from full-service brokers than they lose to those brokers.
Hardly sounds like an unstoppable juggernaut, now, does it? But–you knew there would be a but–that’s not the whole picture. Not by a long shot.
A Wolf in Advisor’s Clothing?
There’s no doubt, says Shaalan, that more wirehouses are adjusting their models to look more like RIAs. He cites as an example the Total Merrill program from Merrill Lynch. Total Merrill is a fee-based wealth management package that includes everything from mortgages and estate planning to business advisory planning and money management. Designed to be tempting to the individual investor, Total Merrill puts everything into a one-stop shop approach. And while in the past, he adds, most private banking divisions were “just going after the mega- and the ultra-affluent, those with $2 million to $50 million in investable assets, now they’re moving downstream and going after the general affluent market,” which Shaalan defines as those with $500,000 to $2 million in assets. This is, of course, the target market of a great many advisor firms: By dollar volume of investable assets for the entire independent industry, including registered reps and RIAs, says Philip Palaveev, a senior consultant at Moss Adams, LLP, in Seattle, 47% have clients with less than $500,000. Thirty percent have clients with $500,000 to $1 million, 19% have clients with $1 million to $4 million, and only 4% have clients with more than $4 million in assets.
While the similarity in models does pose a future threat and the targeting of the slightly less affluent client market poses yet another, one area that advisors may not have considered, says Shaalan, is the potential client who is co-opted by a wirehouse before she has a chance to settle in with an independent advisor. “Advisors in this situation are unlikely to realize that they lost a would-be client,” says Shaalan. “They won’t find out about it. The figures don’t tell the whole story. Anecdotal evidence suggests that advisors are downplaying the competitive threat from outsiders, not just other advisors; more and more advisors are, frankly, not fully cognizant of the magnitude of the competition that could arise in the next few years.”
Since the average RIA firm grew its client base 22% last year, Shaalan says, RIAs may not be that concerned. But they should be, he insists, because the competition is shaping up. Wirehouses may not yet have lured away many clients, but they’re “building up in a way that can offer an effective value proposition to the investor: a fee-based model, no commissions, and a holistic wealth management range of services.” Shaalan points out that wirehouses are also realizing that “investors need one client relationship manager, and only one. They’re building their structure that way so there’s one [relationship manager] who has access to a slew of specialists–from estate planning attorneys to accountants and tax specialists.”
Such a fee-based model and personalized, customized client relationships once helped to differentiate the independent advisor from the wirehouse broker and “financial planner,” Shaalan argues, but now that the wirehouses are embracing both of these approaches, the prime advantages that remain to independent advisors are their independence and their objectivity.
Shape Up or Lose Out
If you ask Mark Tibergien, a principal at Moss Adams who consults to many advisors and is the lead author of the annual FPA Compensation & Staffing Study, “wirehouses are a threat to advisors because of their marketing muscle and market presence, and any shift in their positioning as wealth advisors or financial planners does confuse the market.” Wirehouses are not the only ones pushing advisors, either, points out Tibergien, who also writes a monthly column for Investment Advisor (this month on page 49). “Banks, CPA firms, law firms, and property and casualty insurance agencies have all entered into the traditional independent market,” he says, and “all this noise can be very distracting.” Tibergien sees the main challenge to advisors not in forestalling the loss of clients to these alternate channels, but in being able to let clients know that advisors are out there to help them–”getting opportunities to tell their stories.”
Wirehouses, he says, have not come to the local level where most advisors draw most of their business. If advisors focus on that local level, “actively improving their visibility in the market,” they will reach more potential clients and need to worry less about competition in any form. He has some suggestions as to how advisors can fend off competition from wirehouses and others (see “Advisor, Know Thyself” sidebar on page 90).
“My experience in doing strategic planning for advisors,” says Tibergien, “is that they often are reluctant to admit they have competition. Their perception is that nobody does business like they do, therefore they have no competition. But if this were true, they would have all of the clients in their community. Competition has always been real; now it’s becoming more formidable, but it’s not a time for panic.”
A Back-Door Drain
Palaveev offers a different take on how the wirehouses are providing competition to the independent financial advisor. “For years,” says Palaveev, “wirehouses have been the primary source of independent advisors.” The independents were essentially created by people leaving wirehouses to set up their own practices, he points out. “If that flow were to stop, the independent industry has no mechanism to replenish itself.”
The independents, says Palaveev, have not generally been challenged to find new clients at the moment, even in the current tough market. In 2001 and 2002, he says, independents offering fee-based investment services have increased their average revenue about 5%, despite the markets’ poor performance during those years. On the other hand, advisors who focus on transaction relationships have suffered a decline. “To me,” says Palaveev, “that suggests a movement of clients from transaction- to fee-based relationships. That applies to both independents and wirehouses.”