The wirehouses have been losing market share hand-over-fist since the financial crisis. And according to estimates from Cerulli Associates Inc., the trend may only accelerate over the next three years.
“The advisory industry as a whole continues to rebound, but the four wirehouses are not rebounding,” said Bing Waldert, director at Cerulli Associates. “The years since 2007 represent a worst-case scenario for the wirehouses, as these firms were punished by the bear market and their perceived role in the financial crisis.” The four wirehouses include Merrill Lynch Wealth Management, Morgan Stanley Smith Barney LLC, UBS AG and Wells Fargo & Co.
Total assets under management in the industry finally recovered to pre-crisis levels, topping $11.2 trillion at the end of 2010. That figure was $11 trillion at the end of 2007.
Assets at wirehouses, however, fell from $5.5 trillion to $4.8 trillion during that same period. In market share terms, that's a drop from 50% to 43%. The numbers would have been even worse if not for the $300 billion in assets at Bank of America that were thrown into the wirehouse bucket after the bank acquired Merrill Lynch & Co. Inc. in 2009.
Cerulli is estimating that, based on these trends, wirehouse market share could drop another 8 points to 35% by the end of 2013. “Our projections are grounded in what's happened in the past, so they reflect to some extent another worst-case scenario for the wirehouses,” Mr. Waldert said.
In some instances, the market share losses are by design, as the wirehouses have increasingly focused their resources on more productive advisers serving wealthier clients. Morgan Stanley Smith Barney has been openly culling lower-producing advisers from its ranks for the last year. And more recent changes made by Merrill Lynch to its compensation grid suggest that the focus on the more profitable high end of the market will only increase.
“The market share decline is an after-effect of the wirehouses' focusing on fewer larger advisers with fewer and larger clients,” said Mr. Waldert.
However, perhaps most troubling of all from the point of view of the wirehouses, is the fact that despite their focus on the high-net-worth market, they are losing share there, too. According to Cerulli's research, the wirehouses' share of the HNW market — clients with more than $5 million in assets, fell from 56% in 2008 to 45% at the end of 2010.
So what explains the dramatic decline in wirehouse market dominance? Mr. Waldert says it is a likely combination of three things.
First, advisers are leaving for other distribution channels, with independent B-Ds and RIAs currently the fastest-growing segments of the market. Second, clients are leaving their wirehouse advisers, although Cerulli does not have specific numbers on that trend. And lastly, inferior investment performance — again with no numbers to confirm, may be a factor.
Mr. Waldert says the first two factors are the most important, but suggests poorer investment returns might also explain part of the dramatic decline in assets under management. “It's possible that customer distrust in the wirehouse channel made them more likely to stay on the sidelines, and therefore they didn't participate in the recovery as much as others have,” Mr. Waldert said.
Spokeswoman for Merrill Lynch Wealth Management and Morgan Stanley Smith Barney declined to comment. A spokeswoman at Wells Fargo had not seen the report. Officials at UBS were not immediately available for comment.