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?