What’s Driving Industry Shifts?

The number of wirehouse advisors and their asset base continues to drop, says a report released by Cerulli Associates on Monday. Still, it remains the largest and most dominant channel in the industry.

There were about 51,750 wirehouse reps as of year-end 2011, according to Cerulli, down from 56,900 in 2007. That’s a four-year compound annual decrease of about 2.5%. However, from 2010 to 2011, the wirehouse channel added about 700 advisors for a one-year growth rate of 1.4%. Many of these new reps most likely were hired as Merrill Edge advisors.

This year’s study, the consulting group notes, included input from 6,000 advisors across a variety of FA channels, up from 1,500 in past years. “These survey findings indicate a shifting advisor base between channels, with a lot of activity moving away from the wirehouse firms,” said Bing Waldert, director at Cerulli Associates of Boston, in a statement.

Cerulli attributes some of the cause for the shift between channels to merger activity among the large wirehouse firms—a la Morgan Stanley and Smith Barney—which has led to restructuring. Plus, the strong growth in the RIA channel has caused a shift in focus from wirehouses to RIAs.

Nonetheless, wirehouse advisors’ market share is dominant: Reps in this channel managed about 41% of total assets in 2011. This figure could drop to about 39% this year and 36.5% in 2013.

Other channels, though, have a long way to catch up to the big four: Merrill Lynch, Morgan Stanley, Wells Fargo and UBS. The regional-broker channel, for instance, controls about 16% of assets, and the independent channel (excluding dually registered reps) has about 14%. When IBD reps and dully registered advisors are combined, the total level of assets rises to 22%.

Overall, the industry has been shedding financial advisors as low producers leave the industry. It included about 316,100 in 2011, down from roughly 323,550 in 2010 and 333,250 in 2009, Cerulli says. “With independent channels maturing, there are new options competing for their assets, offering the option of ownership, while providing the necessary support services to ease transition,” the report explained. “Wirehouses need to re-think their value proposition to advisors.” 

The consulting group also explained, “Retaining the largest pool of assets by paying advisors to stay does not equate to a viable long-term strategy. Executives must refocus on a wealth management centric culture, industry leading technology, flexible employment options for their advisors, and resolve their training and hiring issues to fend off the challenges eroding their market share.”

Current Environment

Offering their views on “The Changing Advisor Landscape,” Mark Wiedman, global head of BlackRock’s iShares and Paul Hatch, vice chairman of Morgan Stanley, addressed attendees at the recent Morningstar ETF Invest 2012 conference in Chicago. Hatch promoted the idea of “rep as portfolio manager” and long-term client relationship builder, while Wiedman shared his thoughts on the inevitable changes that technology, transparency, beta exposure and price efficiencies are bringing to the advisor universe.

“The role of an advisor is far more challenging than it was 30 years ago,” said Hatch, pointing to increased regulation, single-digit returns and loads of investment products that keep pouring into the market. “The growth of the fee-based advisor over the last five years has been remarkable, and it was probably keyed off of the events of 2007 and 2008. It’s not a temporary trend, it’s a permanent change in the way advisors view themselves.”

Hatch said that today, wirehouse reps look more like the RIA community, “and it’s a good thing.” And he ventured an opinion about where advisors are headed: “I would be happy if the industry went to nothing but fee-based. It’s right for the client.”