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June 01, 2009 at 04:00 AM
It may be hard to believe, but it was only last autumn when, in what seemed to be a blink of an eye, our capital markets turned upside down. In a matter of months, enduring U.S. investment banks literally disappeared while formerly strong, independent investment houses became neither. In the meantime, the Feds have been relentlessly nationalizing the U.S. financial system. Sadly, we’ve already gotten used to politicians of all stripes skulking around Wall Street.
This has been no simple move along the curve for the financial markets. This is a big lurch in the evolution of the markets. In broker/dealer world, the battle for survival is underway.
Already this turmoil is applying stress to firms and advisors up and down the industry, putting all sources of income under pressure and squeezing margins. Commission income is down, asset management fees are down, revenue from product companies is down. These conditions are requiring us all to take a serious look at how we’re going to do business. Quickly, too, if we’ve any chance to rebuild and gain consumer confidence, which, by the way, has reached an all-time low.
Among the competition that remains–and the banks and wirehouses may have been humbled, but remain formidable forces–the independent channel has the best opportunity to win client trust. Without the inherent conflicts of investment banking and without ties to product manufacturing like the wirehouses, independents are uniquely positioned to satisfy fiduciary responsibilities by serving investors’ best interests. It is a message that’s coming increasingly clear to a substantial chunk of the Wall Street sales crowd weary of bad press and tarnished brands.
But not everyone is going to make it through this market transformation. The landscape is changing dramatically, and it’s reasonable to think that more than a few firms and a good number of advisors are in peril. Said another way, many advisors and broker/dealers who were in the investment business six months ago won’t be six months from now. Not to be too Darwinian, but the survivors in this competition will be the fittest–those companies and advisors that, despite the complexity, confusion, and uncertainty of this marketplace, carefully assess the landscape and move forward with a smart strategy. That strategy will not only rely on reputation, sheer size, or brand, but the quality of product, advice, and service offered. All of these are good for investors, of course, and in turn good for advisors and their firms.
Setting aside the inevitable pain that comes with a transition of this sort, the end result will be a stronger, and much leaner, industry. We are still in the early stages of this evolution, if you will, but in my opinion there are a number of distinct strategic developments already taking shape, the final convergence of which will shape a new order of the independent broker/dealer industry.
An Advisor Free-for-All
When major players like Merrill Lynch and Wachovia can’t survive on their own–the former now acquired by Bank of America Corp., the latter absorbed by Wells Fargo–and Smith Barney and Morgan Stanley are left to create a joint venture, advisors know the brokerage world is hurting. For many, the thrill is simply gone–and ultimately they may be gone, too, either to another broker/dealer or perhaps to head out on their own. A growing number are ‘selling’ their books upstream. A bunch are leaving the business altogether.
At the same time, though, good financial advice is needed more than ever. That means that demand for top-producing advisors will be strong across all levels of the continuum. It is no surprise that the dually registered and RIA space seems be winning the competition. Why shouldn’t it? It is logical that a successful advisor would want to control her own destiny after years of working for big-box corporate firms. The result should be happier advisors who are better prepared to serve the expanding needs and demands of their clients.
To their collective credit, the wirehouse firms are stepping up with aggressive retention package offers and improved payout ratios. But the trend toward independence is already in motion. Independent broker/dealers such as my own firm (Geneos Wealth Management), Commonwealth Financial Network, and Raymond James Financial Services Inc., to name just a few, report record levels of interest from brokers and advisors, including those who want to escape Wall Street firms.
But all of this hunting and gathering favors the industry’s most productive advisors. Smaller producers are likely to be increasingly de-selected from the population through reduced payouts and declining income. The slumping market alone plays a role in lower compensation, but many broker/dealers are downwardly adjusting their compensation formulas at the same time. On the whole, payout schedules are being made steeper, with a lot more differentiation between low production and high production. It’s probable these payout models will shift to become even more differentiated, and to reward even fewer advisors doing the specific kinds of business that particular broker/dealers want. One way or the other, there’ll be fewer folks in the hunt.
Next Stop: Consolidation
