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Practice Management: Time to Make a Change?

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This is a time of peerless financial turmoil. Not only are the prices of stocks and bonds singularly volatile but so are the reputations of financial intermediaries. Last year, a major wirehouse was bleeding advisors as its write-downs surged. This year, that same firm has far outpaced its competitors in recruiting.

Distinguishing the stronger firms from the weaker has never been more difficult: This month’s safe harbor — next month’s road kill? That is the conundrum that financial advisors must ponder as they cultivate and protect their practices. More surprises lie ahead. Anyone who claims that the future of his or her wirehouse is assured is either engaging in wishful thinking or reciting the sales pitch du jour.

Here is what advisors need to do in determining whether to make a move:

1.) Assess motivations: Could the business benefit from a bigger cash cushion, or are clients no longer comfortable with the current firm?

For anyone seeking a lump sum payment to move, the time is now. As the bear market grinds on, firms will have less to spend and will tighten their criteria for deals. A shrinking wirehouse marketplace will only exacerbate that trend. And no matter how skilled the advisor, in a long-term bear market, trailing-12-months performance is likely to decline, which would diminish the value of any deal.

Jumpy clients are another very good reason to look elsewhere. Ideally, clients should view you as the calm at the eye of the storm; your home base should almost be inconsequential to them. But sometimes, even the strongest advisors can’t overcome the objections of important clients who worry about the stability of any given firm.

2.) Think creatively about where the next move should be. Many contracts extend for nine years. Even with a hefty up-front payment, advisors need to be sure that they and their clients will be happy at the new home. Look beyond wirehouses; regional firms, independents and new firms are cropping up.

Brokers may want to look beyond the usual wirehouse suspects – perhaps a regional or independent firm would be a better fit. Upfront money is less generous but regional firms are not as exposed to the toxic investments that brought down the larger players. Advisors generally find regional firms to be more user-friendly. Turnover is much, much lower than at the bigger houses. Of course, they could be gobbled up by the bigger players. Nothing is risk free. Just ask any Madoff investor.

If cash isn’t an issue and clients aren’t clamoring for change, waiting to see how the crisis unfolds is a good choice. Stay put. Of course, that option is not without risk either: Trailing-12-months’ performance could decline as you wait for calmer waters.

And as time goes by the trend points to fewer and few wirehouse choices in the marketplace – although new choices are emerging as well. As I write, three of the five wirehouses are involved in mergers and the remaining two are rumored to be talking about a joint venture. Is this change we can believe in? How successful are these new corporate synergies likely to be?

Several previous combinations were clearly a bust: Bank of America struck out twice with its ill-fated purchases of Robertson Stephens and Montgomery Securities (via NationsBank). What remains of Legg Mason’s unique corporate culture now that it is part of Smith Barney?

The only thing that is clear is that the face of financial advisory services will continue to change at a breakneck pace. Advisors must ask themselves where they want to be and how they will respond. This can only happen if they review every option available and scrutinize their business plans.

The stakes are high. With all the shot-gun weddings in the works, I can’t help but think of the original meaning of the verb “to wed”: It was “to wager.” Now, for better or worse, is the time to determine which wager works best for clients and the advisory business.

Mark Elzweig is president of Mark Elzweig Company, Ltd., an executive search firm specializing in the asset -management industry.


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