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Portfolio > Asset Managers

For Product Providers, Wirehouses Still Rule: Cerulli

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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.

Cerulli anticipates continued leakage of the wirehouses’ more entrepreneurial advisors into the RIA model. At the same time, those who want to recreate the firms they knew and loved will likely go to the largest firms in the regional BD segment.

Even so, Cerulli said, the scale and resources of wirehouses ensure they will be among the most significant distribution outlets to reach retail investors for the foreseeable future.

Cerulli projects that the combined market share of the RIA and dually registered channels will continue to grow through 2018. The primary factor in this evolution is the continued pursuit of independence by the most sophisticated advisory practices.

The report said separating the potential production of advisory practices from the actual business they do with their provider is a constant struggle in territory management. Sales managers can greatly assist in this process by making business planning a key element of their teams’ preparation process.

Despite any initial discomfort for both managers and wholesalers, Cerulli said, working together on annual detailed reviews of a territory at the advisor level will help both participants better understand the dynamics of the territory, and set realistic expectations for production and activity.

According to Cerulli, advisors building investor portfolios before the market crisis commonly relied on Morningstar’s style box. Since then, they have become more active with the idea that they could implement tactical portfolio elements to help maximize gains or avert losses.

However, in the current bull market, their ability to minimize exposure to significant downturns has yet to be truly tested.

The report said this focus on tactical elements offered significant opportunities for asset managers. If they can use their sales teams to share their investment teams’ best ideas, they can help advisors implement tactical portfolio themes.

However, Cerulli cautioned, when dealing with advisors employed by firms with their own economic strategy groups, asset managers must be sure to highlight the ideas that align with those of the advisor’s employer firm.


ETFs are rapidly closing the gap with mutual funds in the amount of client assets they manage, and are a “clear and present danger” to traditional long-only managers, Cerulli said.

Product providers, it said, must strive to design unique products that offer value beyond the potential for alpha in security selection. By incorporating downside risk protection or internal diversification features, providers have greater opportunities to avoid becoming a costly offering in a commoditized market.

In addition, product providers must find outlets within their full range of distribution opportunities where they can build a competitive advantage through product differentiation or the strength of their relationship with BD home offices or advisors.

By targeting opportunities of this nature, providers should allow their sales teams to be more focused on building longer-term investment relationships, rather than trying to be the flavor of the day in a wirehouse advisor’s portfolio.

A key challenge for wholesalers is connecting with advisors on what is most important to them, and differentiating themselves from competitors. To truly matter to the advisors in their territory, Cerulli said, wholesalers must consider making themselves true masters of at least one skill or service that is actually relevant to these advisors.

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