What lies ahead for the major wirehouse/national brokerage firms?
Chip Roame, head of the consultancy Tiburon Strategic Advisors, gives his views:
To really answer this, we have to look first at the past 30 years, and during this time, the three most important things that have happened are: First, financial advisors have turned themselves into small businessmen and businesswomen; so they think more about who their clients are, what their profitability is, and how they run their practice. This is a fundamental change from 30 years ago, when they were largely salesmen.
Second, advisors have shifted their business to fee-based businesses, a fiduciary-type business inclusive and broader than investing, with wealth-management types of services; by definition, this is a more mature, savvier set of advisors with a much bigger set of products to offer and deliver to clients. It's a win for everyone.
Third, advisors have pushed way up market in terms of who their markets are vs. 30 years ago, when firms like Dean Witter served mom-and-pop America.
Today, if you went to say, Morgan Stanley, and said you wanted to open a $60,000 account as an advisor, they probably wouldn't pay you for it much less open it. We've gone way up market.
What do these trends imply for the major national/wirehouse broker-dealers in the next 30 years?
First and foremost, we will see rather dramatic structural change.
In terms of specific firms, my guess is that Merrill Lynch is no longer a stand-alone entity. It's been bought by a bank. Maybe the buyer is Wachovia, Wells Fargo or J.P. Morgan. Let's remember that the purchase of Merrill is a medium-size acquisition for an organization the size of Wachovia.
Citibank has retained Smith Barney. But a Smith Barney advisor and a Citi private banker are now one and the same. They've been integrated completely, not partially as is true today.
Morgan Stanley has most likely spun off its brokers. Morgan Stanley won't, unlike Merrill, cease to exist as a company as it has a huge investment banking franchise; but it will sell the 11,000 Dean Witter brokers. It is a well-run company that makes most of its money in investment banking and trading, not retail; and so, at some point, it decides to move away from retail.
Edward Jones is gone and is certainly part of something bigger.
Wachovia still exists and has merged with Morgan Stanley's advisors or Merrill Lynch's advisors. And Wachovia is the first firm to reach 25,000 advisors.
UBS, which is a bit of mystery, has a similar strategy to Canadian banks in the United States. They don't have any, or at least show any, desire to dominate. Rather, they want to participate in markets as the third or fourth player. And this could be the case 30 years from now, since they have the backing of a large parent firm.
Ameriprise is also a lot bigger, too, and is more of an insurance and annuities shop serving Middle America after having bought numerous other firms.
Could you explain how you see the industry being structured in 2038?
Overall, as the brokers move more and more toward fee-based business, they're less important as a distribution outlet. Historically, investment banks would underwrite a stock, and their 11,000 financial advisors would have the job of going to sell it.
Today, it's not about selling stocks but about managing people's money by putting this money into mutual funds and wrap accounts, etc. The investment bankers will say, at some point, why do we need the retail advisors? They don't distribute what we make anymore anyway. That's why I think that captive retail distribution is a bygone model.
In terms of the buyers we've seen from recent mergers-and-acquisitions, retail banks have bought advisors, insurance firms have bought advisors, and foreign firms have bought advisors. These are the three buyers.
Merrill Lynch, Morgan Stanley's advisors or Edward Jones could get bought by insurance firms or foreign brokerage firms. Absolutely.
But I would find it highly unlikely that Merrill Lynch as a company, including the trading business and the investment bank, could be bought by any organization other than a bank — domestic or foreign; an insurance firm wouldn't want the whole company.
Edward Jones and the Morgan Stanley advisors are in the opposite scenario from Merrill. It's just retail operations being sold, so the insurance companies could be buyers.
And what will the financial advisor model look like?
I think it is going fee-only. Thirty years from now, advisors aren't paid out of commissions. They are financial powerhouses that do financial planning, insurance and banking — everything you can imagine, one-stop shopping.
How about client trends that will impact advisors and firms?
What experts like Walt Bettinger, president of Charles Schwab, are saying is that, we have wealth managers serving the upper quartile of society, but someone has to serve quartiles two, three and four. And the discount brokers will serve these groups.
There could also be some shocking, new disruptive competitor that jumps in. Maybe Microsoft gets into financial services at some point or Wal-Mart, even Facebook. There should be a major disruptor enter the business, specifically to serve sectors two, three and four — not to go after the high-net-worth market.
In the future, I see the wirehouse advisors, their independent brethren and the RIAs all going after the top quartile. And the other 75 percent to 80 percent of the market is served by discount brokers like Schwab and/or another innovator like Google, Microsoft, Yahoo or even H&R Block — someone who's gone after that space to make money serving relatively small accounts.
In the upper quartile, a good piece of news is that this space is growing rapidly as baby boomers age. They have money tied up in 401(k) plan balances, small businesses and homes now. But as that money gets released and becomes investable assets, the number of people with $1 million, $2 million, $5 million and up will grow dramatically.
So advisors end up staying in the high-net-worth market, because they can. That market is getting a lot bigger. There is nothing wrong with that, but it means someone else can come along and innovate below this quartile.
What will all these changes mean for how advisors do business?
What you should expect to see reflects the fact that the financial-services industry is a very high-margin industry relative to any other industry, at around 50 percent, which is pretty good. This means that advisors will be building much bigger teams. Today, what we see as advisors team up is in its infancy. We'll see 10-, 20-, 30-, 40-, 50- and 100-people teams.
In other words to serve clients, we'll see advisors form a radically different team-based structure than what we see today. This will have hierarchy to it, so everyone's not talking to the client and not everyone collects the fees.
The economics of these teams stays very rich for the advisor. As the bread winner — the person bringing in the clients — as they add more new clients, they will add lots of staff — not as equals, but as subordinates.
How about the scale of firms and technology?
We may or may not see a complete move to independence here, but you could see some radical things along these lines. You could see, for instance, Morgan Stanley selling its brokers to LPL Financial.
Think about what LPL's becoming as an 11,800-rep firm today. They have a bank channel and a clearing business. They are becoming an advisor-centric retail shop, likely soon to have an RIA model as well. And I wouldn't be surprised that as Morgan Stanley exits the retail business, its advisors become LPL reps. I could see that happening pretty easily.
That would radically change the economics, and — in terms of technology — it will all depend on what form you see it. If you think back to how the insurance industry worked in the 1980s, it was all about captive agents, as we have today at the wirehouse firms.
But in the insurance world, the reps have drifted further and further independent. Now, there are only a few firms with semi-independent reps.
This could happen to the entire brokerage force; advisors could all be independent, but hang their hats at and use some technology that belongs to the large organizations. But they will own their own businesses.
You can already see these chinks in the armor. Wachovia and Raymond James have created an array of five choices for affiliation, a sliding scale of affiliation. This is a beginning of the migration toward independence within the big brand names.
This is what's different. What used to be independent meant being by yourself as a money manager, and captive meant sitting at a big wirehouse office. Now, we have a middle position where you can be independent but with a big brand name. That's interesting — and it's probably the future. So advisors, more so than today, are really in control of their clients.
How else will these shifts affect the major firms and advisors?
These changes mean that brand names become more important. As younger baby boomers age and get wealthier, they will go shopping. They aren't going to find truly independent advisors. It's going to be a lot easier to find a big brand name, like a Wachovia broker and not Chip, the independent financial advisor or money manager.
And the next generation, as well, knows brand names. And they haven't necessarily been investing along the way, but will go invest with a brand when they're ready to.
The structural change will be huge. Fundamentally, the wirehouses will look completely different from what they are today. The pieces will be owned by different players, and some of the brand names we take for granted today will be gone.
The simultaneous movement from commission-based stock sales to fee-based money management, and from small clients to big clients, puts all the power in the financial advisors' hands. Thus, over the next 30 years, you increasingly will see that the financial advisors decide what the model is.
Chip Roame is managing principal of Tiburon Strategic Advisors, a financial-services consulting group located in the Bay Area. Tiburon hosts The Tiburon CEO summit twice a year, in New York City in the spring and San Francisco in the fall.