Slash and burn: The new Wall Street growth model

After a decade of pushing fee-based services, Wall Street is slashing and burning the infrastructure that has supported the business.
DEC 15, 2009
After a decade of pushing fee-based services, Wall Street is slashing and burning the infrastructure that has supported the business. The moves threaten to damage the long-term health of the wirehouse business model for financial advisers and their clients. On the new Wall Street, wirehouses are gutting the home office staff that has driven the growth of fee-based business. Successive rounds of layoffs have shrunk manager research departments, key accounts, product management and field wholesaling teams. One major wirehouse recently nuked its popular adviser coaching department, which was staffed by more than 30 highly experienced professionals. Also greatly reduced: specialized sales forces for retirement planning, wealth management, alternative investments and separately managed accounts. At one firm we know, one person — a jack-of-all-trades — has replaced a field team of 10 specialists. Even getting a simple phone call returned from the home office is turning into a trial. Forget about one-on-one attention. The restructuring isn't over. James Gorman, who takes over the helm at Morgan Stanley next year, promises to wring out $1 billion in savings from its joint venture with Smith Barney's retail shop. Perhaps the only people enjoying the changes even less are the money managers themselves. Managers new and old to Wall Street complain that they can't connect to gatekeepers. And no wonder — many relationship managers who used to help managers extend their reach and offerings within firms are gone or difficult to access. The head of key accounts for a major mutual fund company reported that his relationship management person at one of the newly merged wirehouses shepherds 60 other managers. Another firm has laid off 17 research analysts, leaving behind a meager eight to sift through the managers banging on their doors. Haggling over fees is consuming much more of the time of outside managers. One senior mutual fund executive told us that his team spends up to 40% of its time negotiating fees, up from 10%. Wall Street remains relentless about cutting costs, finding low-overhead ways to replace the scaffolding that supported fee-based business, which is more complex than the old-fashioned world of commissions. Stock sales, of course, came under fire in 1996 when former Merrill Lynch & Co. Inc. chief executive Dan Tully headed a Securities and Exchange Commission task force to examine the conflicts of a commission-based sales force. Technology has become an increasingly important partner in training advisers — especially the average producer. Wirehouses are sponsoring fewer live meetings and instead are delivering webinars to desktops. Outside organizations, including the College for Financial Planning and the Investment Management Consultants Association, are playing bigger roles as well. And some astute advisers are putting out welcome mats to representatives from the money managers to help them understand the fine points of the investment process — especially important for products that don't make it on to the so-called short list. As the newly merged firms consolidate platforms, there will be changes in managers which will require advisers' careful attention. The tougher environment at brokerage firms has given a boost to independents and registered investment advisers. Many investment managers will find a more natural fit with this subgroup of advisers who, like them, tend to be more entrepreneurial and more inclined to seek out-of-the-box investing solutions. A number of mutual fund companies have placed bets that real growth will come from RIAs and independents, and are dedicating sales forces to those channels. RIAs are especially more patient, if selective, when it comes to manager wholesalers. They typically spend one or two hours reviewing products, compared with the five- to 10-minute meetings that many wirehouse advisers prefer. But even then, getting in the door is no cakewalk. In my view, it is a little ironic that firms are cutting back on training and due diligence after the worst market bust-up in 70 years. But competitive forces seem primed to prevent firms from spending any amount that doesn't have a dotted line direct to a dollar sign. After all that has happened, you would think that somebody somewhere would at least ask if that were such a good idea for advisers or their clients. Mark Elzweig is president of an eponymous -executive-recruiting firm that has worked with advisers and asset management companies for 25 years.

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