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Why the Wirehouse Advisor Is Still Alive — and Kicking

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What You Need to Know

  • Wirehouse advisors were predicted to become extinct, with the flight to independence driven not only by advisors but also by clients who have wanted a conflict-free experience.
  • These firms created products and services, and relied on the latest marketing messages to remain relevant.
  • While many advisors have left the wirehouses, the majority of top-producing reps chose to stay. Here's why.

If you have been an observer of the wealth management space this past decade, then you likely have seen the long list of news articles, academic studies and opinion pieces forecasting the imminent death of wirehouse advisors.

You know, the 50,000-plus strong advisor force that still resides at UBS, Merrill Lynch, Morgan Stanley and Wells Fargo?

Particularly as the markets have ebbed and flowed over the years, employee-based advisors and their motherships have been under tremendous pressure to keep up with the times and survive the many scandals and crises that have come at them — most of which, by the way, were caused by their own greedy devices.

The prime example being the great financial crisis of 2007-2009 that saw many of these firms go bankrupt or forced into acquisitions by large banks to remain solvent due to their massive mortgage-backed securities failings.

When you combine their many missteps with an archaic, conflict-rich, product-sales culture and an industry that is rapidly changing, it’s no wonder that the term “breakaway broker” has become part of the lexicon.

So much so that for many analysts and observers, wirehouse advisors were predicted to become extinct in the coming years, with a massive flight to independence driven not only by advisors leaving these firms but also from their clients who are seeking a better, more objective and conflict-free experience.

Ultimately, you would think that a once-in-a-generation financial crisis would seal their fate; however, you would be wrong.

Not even the mind-boggling fake-accounts scandal at Wells Fargo has seriously dented the momentum of the wirehouses as they are emerging from their new bank-owned status and are now thriving in today’s bull markets. In fact, according to Cerulli, the wirehouse advisor channel actually has been growing — from $8 trillion in 2018 to over $12 trillion in 2020.

How can this possibly be?

A History Lesson

Before we get into those sordid details, let’s take a step back and look into the origins of the wirehouses and where these institutions came from to gain perspective. The term wirehouse owes its ancestry to back in the day, before the Internet and modern communication methods, Wall Street brokerage firms were connected to their branches primarily through telephone and telegraph wires.

This enabled branches to have access to the same market ­information as the home office to enable their brokers (they were called brokers back then) with the ability to provide quotes and the latest market developments to execute high-commission transactions on behalf of their clients.

Believe it or not, this wire-connected experience was a competitive advantage for decades, providing a select group of wirehouse franchises to emerge with access to tens of millions of investors across the country, all of which ultimately created their historic growth and brand recognition.

But as we know, technology evolution and the rise of the discount brokerage industry dramatically leveled that playing field and now anyone with a smartphone can get quotes, market information and execute trades “commission-free” with the swipe of a finger from literally dozens of providers.

At the same time, new technology platforms emerged along with no-load mutual fund marketplaces creating an emerging business model for becoming an independent advisor.

These new custodial and clearing platforms enabled independent advisors to “unbundle” their advice from the product transaction, creating a clear, objective, fee-based differentiation for independent advisors so that they could easily charge for their advice directly in a fiduciary, conflict-free model.

It’s a Wrap

Once again, this should have been the end of the wirehouses, however, what we have seen time and time again is their ability to create new products and services and wrap themselves in the latest marketing messages to remain relevant.

Key to this ability is their product geniuses who went back to their bundling-play book and developed the separately managed “wrap account” at upwards of 300 basis points, all-in.

These wrap accounts re-bundle the cost of investment advice and management with transactions via an opaque product structure that includes money manager fees, underlying product fees, platform fees, trading costs and of course the obligatory advisor commission, all for one convenient and non-transparent bundled fee.

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Combined with the marketing and sales machine of tens of thousands of incentivized brokers, “fee-based advice” was king on Wall Street as there are now trillions of dollars in fee-based accounts across the wirehouse industry, quietly churning out record revenues year after year for the big firms and their advisors.

The revenues wirehouse advisors can generate from these fee-based products stemmed much of the pain that top advisor teams inside the wirehouses were feeling from the antiquated technology they were forced to use, the negative brand headlines that made them have to defend their firm to their clients daily, along with changing payout structures that left them in constant sell-mode just to maintain their compensation levels.

So, while there have been a significant number of advisors leaving the wirehouses in pursuit of greener pastures as independents, and there are more options and resources for going independent than ever before, the majority of top advisors have chosen to stay.

In fact, Morgan Stanley, for the first time in recent memory, stopped the hemorrhaging of its advisor headcount and actually grew its advisor base by adding nearly 500 new advisors last year.

Seeing the Light

Along the way, wirehouse management began to see the light and has been aggressively investing in both advisor and client experience digital and financial planning technology.

Merrill Lynch with its fast-growing Merrill Edge business has successfully bolted on a digital platform aimed at lower net worth and next-generation investors that has successfully onboarded hundreds of billions of dollars in client assets.

Combined with the tens of millions of bank accounts at its parent company, Bank of America, Merrill has successfully developed a growing pipeline for cross-selling and referrals to Merrill advisors.

Morgan Stanley, also seeing the fruits of a down-market technology play, quickly followed suit by acquiring E-Trade and its millions of customers, creating its own next-generation and emerging investor pipeline for referrals to Morgan Stanley advisors.

Whether or not these up-selling technology strategies work remains to be seen, but on paper, the opportunity to harvest these millions of accounts holds great promise to motivate these wirehouse advisors to continue to stick around.

What these recent technology developments have also shown is that despite their many flaws and self-inflicted wounds, these iconic Wall Street brands still carry a lot of weight in investors’ minds when it comes to choosing which wealth manager to work with and why.

They also show that while these legacy institutions are often slow to react, they have proven that they can adapt to the changing environment and shifting consumer preferences.

This ability to change promises that the wirehouses will remain a significant presence in wealth management, despite consistently losing market share to independents for the past two decades.

If wirehouse management can continue to make the big technology decisions to improve the advisor and client experience, wirehouses have the opportunity to stem the slide in their market shares, and with any luck, even increase their momentum if the bull markets continue.

That is — the cynic in me thinks — until the next financial catastrophe they cause gets in the way of all of that again.

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Timothy D. Welsh, CFP, is president, CEO and founder of Nexus Strategy, LLC, a consulting firm to the wealth management industry and can be reached at [email protected] or on Twitter @NexusStrategy.

(Image: Shutterstock)