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Technology > Investment Platforms > Turnkey Asset Management

IBD Execs Open Up About Industry Shifts

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Independent broker-dealer executives generally recognize that a tough path lies ahead for the business due to rising regulatory pressures and associated costs, IT demands and other challenges. They disagree, though, on exactly what that means for their firms and affiliated advisors.

“There will be fewer advisors and fewer broker-dealers in the future, no doubt,” said James Poer, president and CEO of Kestra Financial, during a panel discussion on Jan. 30 at the Financial Services Institute’s OneVoice conference near Dallas.

Data released late last year from the Financial Industry Regulatory Authority, for example, shows the number of member firms dropping to 3,835 in 2016 from 5,374 in 2002. In Poer’s view, IBDs that aggressively invest in people, technology and related resources “are going to be the winners.”

For Cetera Financial Group CEO Robert Moore, these investments should translate into the creation of “an advice-centric experience for clients.” They also must include “a shift in [advisor] engagement away from professional product sales to more objective planning and solutions,” he explained.

Plus, Moore says, IBDs must marry technology and human capital, so that advisors’ — and the industry’s — offerings adequately address the future needs of clients: “It’s about the information you have about clients and how you create touchpoints, emotional responses … it all dovetails into a very delightful and exciting opportunity in our profession and is a way to distance ourselves from [robo advisors].”

Moore sees advisors winning out over IT. “The depth and context for relationships will be highly transformation over the next few years,” he said. “It’s not about investment management but about advice — as the tech curve progresses and human touch becomes more important.”

This means firms and advisors need to “get more efficient and more effective and deeper in their relationships,” the executive said. They have a pretty big incentive to do so, he points out: “Over next 10 years, the money in motion will … have a big T [for trillion] on it… We just have to equip and prepare advisors to do all this [change], and [clients] will pay what they pay today.”

Moore sees advisors as being able to keep and even grow fees by offering concierge-type services. “I don’t believe in [fee] compression … But there’s a lot of work to be done,” he said, adding that he’s “excited” about the future of the advice business.

Paradigm Shifts

The advice business made a major transformation when it went from its focus on commissions to one based on fees, according to John Rooney, managing principal-San Diego, for Commonwealth Financial Network. “The best and brightest brokers swore at the time that they would not do it … it was too expensive for clients,” Rooney explained. “But [then] they converted, and the marketplace overwhelmed them.”

Today, the industry is facing a second paradigm shift — moving from asset management to wealth management, he says: “The public value proposition is going from money management to holistic planning.”

Advisors that don’t make this adjustment “will be consolidated or merged out of the business,” Rooney added. For broker-dealers, this means their main task is to help advisors offer holistic planning “at scale” by giving them coaching, tech tools and the like.

Poer sees the change as entailing the delivery of a new end-client experience: “It’s time to rebuild the value set and how advisors deliver value,” he said. Displacement and consolidation in the industry are related to this changing value proposition.

Firms working with the older, more traditional IBD business model “are not going to make it,” the Kestra chief says. Instead, they need to turn themselves in to service-oriented, technology-based organizations. “Today, it’s about building out a deep tech experience and staffing” and about having passion “for the end game of creating the unique client experience,” he explained.

Cetera’s Moore sees a new client experience coming to life, which should help advisors and IBDs thrive. “Today, there’s just a statement and market updates [instead of] an enriching, goals-based [experience] ‘wigitized’ into a customized landing page for them,” he explained. This experience could include information about clients’ hobbies “rather than the anesthetized portfolio, which is not what clients care most about.”

Wirehouse Updates

Merrill Lynch and Morgan Stanley reported their latest advisor tallies, profits, fee-based assets and more for the fourth quarter and full-year 2017. Bank of America Merrill Lynch and Morgan Stanley don’t share the exact same figures, but there’s much to be gleaned from their latest quarterly earnings results.

Morgan Stanley advisors have about $2.37 trillion in client assets — up 13% in Q4’17 from a year ago vs. $2.31 trillion at Merrill Lynch, which had a 10% year-over-year jump in assets. But when assets at U.S. Trust are combined with those of Merrill, the Bank of America Global Wealth & Investment Management group, the unit has some $2.75 trillion (which also represents a 10% jump from the year-ago quarter).

Morgan Stanley has 15,712 advisors vs. 14,953 at Merrill Lynch. If Merrill’s consumer banking/Merrill Edge advisors — which number 2,402 — are included, its ranks swell to 17,355. It also has 1,714 US Trust registered reps.

Merrill says its advisor force grew by 231 from a year ago, while its Thundering Herd decreased by one from the third quarter. Morgan Stanley, though, says its headcount fell 51 from the prior year and 47 from the earlier quarter.

Morgan Stanley’s advisors have 12-month trailing production of $1.12 million as of Dec. 31 vs. $1 million for Merrill’s Thundering Herd. But Merrill also shares the performance of its veteran advisors (which excludes the production of the roughly 3,000 reps in its training program): $1.31 million in Q4’17. Morgan Stanley says the average level of assets per advisor is $151 million. Merrill doesn’t provide that figure.

Wells Fargo’s Latest

Outgoing Federal Reserve Board Chair Janet Yellen announced in early February that Wells Fargo is banned from growing until it shows that it has resolved certain shortcomings. According to Wells Fargo, this could cost it as much as $400 million in profits this year.

“While operating under this constraint, we are open for business, and we will continue to serve our customers’ financial needs, including saving, borrowing and investing,” said CEO and President Tim Sloan in a statement on Friday.

According to the bank, the cap impacts assets on Wells Fargo’s balance sheet and not assets in brokerage or related accounts held by clients of its 14,500 advisors. But how willing will wealth management clients be to give advisors new money or become new clients in general?

“They are making a series of statements, and their efforts to change are sincere,” said recruiter Danny Sarch of Leitner Sarch consultants. “But department by department by department, they are showing that they do not care to put the client first — from mortgages to car loans to bank loans.”

While Wells Fargo Advisors has not been found guilty of any misbehavior by authorities or regulators, clients of the unit have watched the scandals unfold on the banking side. “To think that referrals within the bank, i.e., cross-selling, are as robust as they were before all this [news] broke is naïve in my view,” Sarch explained.

For an advisor who is in the process or considering moving to WFA, “How can you explain that this benefits the client, and how can you make that argument? It’s tougher than ever right now,” the recruiter said. For existing advisors working to add assets from current clients and prospects, Wells Fargo is, once again, dealing with “headline risk.”

Bank analyst Richard Bove of Vertical Group says Wells Fargo has not increased its assets substantially over the past six quarters and hence the decree should have a very limited impact. As for wealth management, the business is changing for Wells Fargo and its competitors as cheap ETFs dominate the field. “It means you have to sell mortgages, make loans and the like,” he said. That broader trend, and not the decree, will impact the unit’s performance.

Keefe, Bruyette & Woods analyst Brian Kleinhanzl has a mixed view. “We are not expecting another shoe to drop from a regulatory perspective, but there is increased uncertainty about when the [order] will be resolved.”


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