For Product Providers, Wirehouses Still Rule: Cerulli

Since 2008, turmoil in the wirehouse channel related to mergers and acquisitions and an increased focus on profitability has benefited independent affiliation models.

This hasn’t ceased, but in a new report, Cerulli Associates anticipates greater stability of the wirehouse channel as the financial crisis continues to fade in the rear view.

Cerulli’s research shows that wirehouses dominate traditional advisory distribution, controlling 42% of the market.

The analytics firm reported last year that in 2009, the four New York wirehouses — Bank of America Merrill Lynch, Morgan Stanley, UBS and Wells Fargo — controlled 44% of high-net-worth assets, a big drop from 53% two years earlier. By 2011, wirehouse market share had stabilized in the low 40% range, and has remained there.

Cerulli said that although it expected modest reductions in wirehouse market share in the near term, the channel would remain the premier distribution opportunity for product providers.

Where the Opportunities Are

According to the report, active managers are finding it hard to outperform lower-cost index products in the current low-volatility, strong equity performance environment. Strong equity performance tends to undermine disciplined portfolio fundamentals in the quest for higher returns.

Cerulli said providers of products that have recently been out of favor should view current conditions as an opportunity to remind their target advisors that now is a good time to reconsider whether their client portfolios are positioned to protect the downside as much as they are poised to capture potential returns.

In 2009, ETFs saw asset flows into bond products for the first time exceed U.S. equity products on which they had long been focused. Cerulli expects further entries into the ETF segment, combining traditional managers’ investment expertise with ETFs’ lower costs and immediate liquidity of ETFs.

This means that managers will need to incorporate ETFs into their comprehensive product suites to maximize their distribution opportunity set.

Wirehouse executives report that the vast majority of flows on their platforms go into offerings the firm recommends but does not mandate, according to Cerulli. Advisors are able to use the home office for initial due diligence to ensure they are picking a competent provider before engaging in their own analysis and essentially putting their own stamp on their client portfolios.

Given a fiduciary standard governing client accounts, Cerulli said, this hybrid solution is a best-case scenario for broker-dealer platforms as it gives advisors the flexibility they insist on, while also leading them toward the options a more qualified team of trained investment specialists has deemed most promising.

The Cerulli report noted that hybrid wholesaling and product specialist wholesalers exemplify some of the emerging trends in distribution strategies.

Hybrid wholesaling promotes face-to-face relationships with advisors, but also recognizes that many advisors prefer that most of their wholesaler interaction be handled remotely after an initial relationship has been established. Likewise, specialist wholesalers address the demand for more sophisticated investment analysis at the advisory practice level, while recognizing that field wholesalers cannot truly be experts in every product they represent.

Cerulli said field wholesalers should be encouraged to introduce their advisors to products specialists when necessary in order to reinforce their firm’s commitment to supporting advisors according to their individual needs.

Challenges and Risks

Following the 2008 financial crisis, wirehouses refocused on maximizing their profitability rather than their scale, the report said. But by eliminating support staff, botching technology rollouts and increasing management dictates, and feeling pressured to cross-sell additional products, they undermined much of the goodwill the firms had built with their advisor base.