Out of the ashes, wirehouses rise

After years of demonization and defections, the Big Four firms look to go on the offensive

Apr 14, 2013 @ 8:32 am

By Andrew Osterland

Like a phoenix rising, wirehouses are starting to regain the competitive edge they lost during the dark days of the financial crisis.

In other words, they're baaack.

After years of cost cutting and deliberate downsizing, the buoyant investment markets and an accommodating Federal Reserve have helped wirehouses build revenue and profits, and improve the productivity of their advisers.

While independent broker-dealers and registered investment advisers are proving formidable competitors, they're unlikely to force wirehouses into a full-fledged retreat from the advice industry.

“The wirehouses are still a huge share of the market and they have a lot of money to invest,” said Alois Pirker, research director at Aite Group LLC. “It's wishful thinking by some that the wirehouses' market share will evaporate. They've stabilized and I expect they will start growing at a good clip again soon.”

“The independent firms and the RIAs have gotten bigger, but the bad years are behind the wirehouses. We're going to see growth from them now,” said Eric Sheikowitz, a senior managing partner at advisory consultant Focus Partners LLC.


That wasn't the case over the past five years as the wirehouses were plagued by plunging market share, adviser defections, regulatory investigations and investor lawsuits. Seen as the chief culprits for the housing bubble and the financial crisis that followed its bursting, the biggest firms were easy targets for old and new competitors alike.

But as bruised as the Wall Street brands have been, many now believe they are ready to go on the offensive when it comes to their wealth management franchises.

Consider UBS AG. Under the leadership of former Merrill Lynch & Co. Inc. executive Robert McCann, the UBS Wealth Management Americas division posted record pretax profits of $873 million last year and had net new money flows of $22 billion. It added 93 advisers during the year, and average assets under management per adviser hit a record $114 million at the end of the fourth quarter.

Morgan Stanley, whose tumultuous integration with Smith Barney has been a godsend for industry recruiters, is also posting much better results. Last year, the number of representatives at the firm fell another 4% to below 17,000 as the messy migration to a new technology platform took its toll. However, average revenue per rep in the fourth quarter was up 13% to $824,000, and average assets under management grew 14% to $106 million. The fourth quarter pretax profit margin was 17% — short of chief executive James Gorman's early stated target of 20% but a major improvement from the single-digit margins it has earned for most of the past few years.

Likewise, Bank of America Merrill Lynch increased revenue last year. The average productivity of the Thundering Herd was up 7% to an industry-best $935,000.

Wells Fargo Advisors, which experienced the least amount of fallout from the financial crisis, posted record income for its wealth, brokerage and retirement division in the fourth quarter. The adviser ranks grew 1% last year and client assets grew 7% to $1.4 trillion.

“Between the mergers, the consolidation and the brand issues that the wirehouses have experienced, the last five years have been extremely disruptive,” said Alex Pigliucci, global managing director of Accenture's wealth management business. “But we're starting to see great numbers on production and net income.”

A notable sign that the big firms could be stepping up their game is their renewed commitment to training new financial advisers. Like all the large firms, Merrill Lynch — once the training ground for thousands of advisers in the industry — virtually abandoned the effort after the financial crisis. Last year, however, it revamped the program, bringing on 2,500 trainees for a total of 4,300 recruits in the three-year program.

There's no denying the loss of market share that the four wirehouses have experienced since the financial crisis. Their share of assets in the industry shrank from 47.8% at the end of 2007 to 41.1% at the end of 2011, according to Cerulli Associates Inc., and likely will drop further, Cerulli analyst Scott Smith said.

The total number of advisers at the four firms fell from 56,901 to 51,450 in that period — to some degree by design, as the firms worked to improve their operating margins.


Mr. Smith expects that the share declines and adviser migration will moderate — if not reverse. “We see them stabilizing at just under 40% of the market long-term,” Mr. Smith said. “With more than 50,000 financial advisers, there will be defections, but I think a lot of the advisers who want to go independent probably already have.”

The environment is undoubtedly more competitive. LPL Financial LLC and other independent broker-dealers continue to expand their adviser ranks and client bases. The RIA world is far more organized than it was pre-crisis, with better technology platforms and greater access to products and services, thanks to the growth of custodians and of roll-up firms that have more clout with product providers.

Industry recruiters are hopeful that the winding-down of the retention packages given to a large number of advisers at Merrill Lynch and Morgan Stanley during the financial crisis will spur another wave of defections. But lately, the numbers have been dwindling.

“The breakaway-broker trend has been overhyped,” executive recruiter Mark Elzweig said. “The regional firms and RIAs gloating over the misfortune of the wirehouses expect to reap a recruiting bonanza. They're going to be disappointed.”


Judging by the tweaks to their 2013 compensation grids, Merrill Lynch and Morgan Stanley, the two biggest firms, are gearing up for growth now, providing additional incentives for advisers to bring in new assets and expand offerings to clients to include banking and insurance products in the hope of developing stickier relationships.

The reputations of the wirehouses may still be in the dumps, but that hasn't led to a mass exodus of advisers and clients — the simple reason being that clients are loyal to their adviser, not the firm. And while wirehouse advisers are rarely happy with their firms, they also don't like the hassle of leaving them.

“Hopefully, this is the last stop I make,” said one adviser in his 40s who left Merrill Lynch for another wirehouse at the end of 2008 because he didn't want to work for Bank of America. “It's not about the money. People don't understand how difficult it is to move a client base.”

That, and the security of working for a large firm, will continue to be an advantage for the wirehouses.

“Not every financial adviser wants to be an entrepreneur. Some of the smartest and most productive advisers work at the wirehouses, and that's the best model for them,” Mr. Pirker said. “I have no doubt that the wirehouses will be major players in the industry for years to come.”


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