Nary a day passes without some brokerage firm or another announcing an initiative aimed at attracting wealthy, or very wealthy, customers.

With their new private wealth management groups, more sophisticated money management offerings, alternative investments or “segmentation” strategies, the major Wall Street firms exhibit all the signs of obsession with big-game hunting.

Of course, they're chasing a relatively rare species: The richest 10 percent of the U.S. population, with a median net worth of about $2.1 million, according to the Federal Reserve (assuming half those assets are investable, that's the vaunted million-dollar client).

Obviously, everyone yearns for these trophy clients — that's where the money is. But the dogged nature of the pursuit begs a few questions: Are there enough of them to go around? Are wealthy clients so profitable as to warrant the attention they're garnering lately? And perhaps most importantly, are the major brokerage firms losing interest in the everyday investor who has been the very foundation of many of its successes?

Or, to put it another way: Is Wall Street abandoning Main Street?

To Up-Market We Go

It's undeniable that the New York-based wirehouses are moving up-market when it comes to investable assets. Almost every firm is making a priority of increasing rep production while reducing the absolute number of clients it must deal with face-to-face.

On at least one level, this makes perfect sense: The most profitable clients are those with the most money, and the economics of the business — high overhead, compression of fees — demands that Wall Street go after those who return the most.

“It's a very narrow realm on which to concentrate, but a significant portion of the assets are in this market,” says Scott Slater, analyst at the Spectrem Group, a Boston-based consultancy.

Indeed, from 1992 to 2001, the top decile of the income distribution ladder has seen its net worth rise by a whopping 69 percent, according to the Federal Reserve. This group also owns more than half of the publicly held equities in the nation.

Bob Mulholland, head of Merrill's global private client group for the Americas, says Merrill is gunning for these clients more aggressively. “We're definitely moving more upscale,” he says.

Perhaps nowhere is this focus shift more evident than in the way Merrill is dealing with the other end of the spectrum — those with under $100,000 in assets. In general, these clients are being serviced over the phone, through Merrill's call center, rather than in face-to-face meetings with advisors. Over a million Merrill clients are now call-center material. The segmentation frees the firm's advisors to concentrate on wealthier clients — those in “roughly the $500,000 to $5 million-plus area,” says Mulholland.

Merrill is hardly alone in its approach; Morgan Stanley, UBS, Smith Barney and Wachovia are all moving up-river. The president of Wachovia's financial services group, Brand Meyer, said the firm now considers its sweet spot “a few hundred thousand dollars to several million,” and it, too, is experimenting with ways to service more clients through call centers.

Here's the Rub

Trouble is, the supply of wealthy clients is insufficient to satisfy all the advisors chasing them. Some detail: There are 2.2 million U.S. individuals with more than $1 million in investable assets. Assuming every broker wants 150 million-dollar clients, there are enough rich clients for about 15,000 brokers. That would leave more than 90 percent of the active registered reps out of the high-net-worth game. (There are an estimated 800,000 registered reps, roughly 250,000 of whom are active practitioners.)

When asked whether there are too many people chasing high-net-worth clients, Mulholland says, “I have to say yes. What you have to do is be a better chaser.”

One of the factors giving some urgency to this chase is rising costs at the firms. With new investors and products flooding the market over the last decade, financial advisors have migrated toward offering more comprehensive advice and planning services to their clients. This extra work had translated into better pay. According to the VIP Forum, a Washington-based group that advises firms on high-net-worth financial services, the average “relationship manager” saw his compensation rise to $92,000 in 2000-2001 from $65,500 in 1994-1995 — a 40 percent increase. Meanwhile, over the last decade, fees collected on asset management have declined to 98 basis points from 1.03 percent, and the shrinkage is expected to continue.

With expenses heading up and revenue heading down, something has to give. In many cases, that “something” is the sort of service delivered to the less-than-rich client.

“I don't want to say you have to ignore the retail investor, but most of [industry] revenues are tied up in affluent accounts,” says Michael Kostoff, executive director of the VIP Forum. “Three-quarters of all non-qualified accounts are held by the affluent or high-net-worth clients.”

To help ensure reps concentrate on the right clients, firms are reducing, or eliminating altogether, payouts on transactions for smaller accounts. Not everyone is happy about this development. At Prudential, for instance, reps balked at having to refer sub $25,000 accounts to the call center for servicing, and since merging with Wachovia, the firm has since softened its requirements somewhat.

Still, other reps say that the call center is the right place for smaller accounts, because advisors have such little time to devote to them that the clients are actually likely to get better attention and advice from the call center (see sidebar).

Another strategy, embodied perhaps most successfully by the Total Merrill program, involves encouraging smaller accounts (and large accounts for that matter) to become more profitable by expanding their financial relationship with the firm. This is often accomplished with non-investment products, such as checking accounts and mortgages.

Small Fish Still Taste Good

As attractive as high-net-worth investors might be, some broker/dealers — notably independents — relish the fact that larger brokerages are de-emphasizing clients in the lower reaches.

For instance, the independent broker/dealer Royal Alliance, a unit of AIG, feels it is a relatively attractive option for the $100,000 client that many firms would devote less time to. “If you have $100,000, you don't want to tolerate something less than excellent service,” says Mark Goldberg, president of Royal Alliance, which has 3,000 independently affiliated reps. “It's a fabulous differentiator for us from the wirehouses.”

Those working at indies say their open architecture gives them access to a wide range of products, and their business model, featuring less corporate overhead, makes dealing with smaller clients more economically feasible. The fact that advisors are willing and able to deal with clients face-to-face is an added bonus in trying to woo customers from the wirehouses.

The independents are not blind to the benefits of wealthy clients. But in the current market they seem more willing to embrace the potential of lower-asset clients, the idea being that today's bit player might be tomorrow's high-net-worth client.

This optimism is bolstered by that famous wealth transfer expected in the coming years — an estimated $40 trillion is trickling down to a new generation, as Baby Boomers his estate-planning age. Many recipients of these funds are small potatoes now. The advisor who serves him well has pole position in securing the post-inheritance business.

One regional manager at AXA Advisors says he's willing to take, for instance, a $15,000 401(k) rollover, because it will be grow steadily over the years. “Those are clients that next door at Merrill, they'd move to a call center,” he says.

Prime among the clients targeted by independents are members of the “emerging affluent” — those with a couple of hundred thousand to invest. According to NFO WorldGroup, a Hartford-based consultancy, these people need advice, but they're not using financial advisors: About one-third consider friends or family members their primary advisor, while another 40 percent use accountants or other “non-traditional” channels for advice. Further, members of this group have seen their median stock holdings decline since 1998, while, improbably, the top decile has seen theirs increase. This is an indication that some advice is in order for the second-tier group.

Independent firms are also hoping to capitalize on distrust of larger brokerage firms because of the sell-side research, mutual fund trading and other scandals that have plagued the Street during the last two years.

Not Giving Up

However, for all the evidence to the contrary, independents are not the only advisors caring for smaller investors.

“There are a lot of valuable clients that are getting lost in the mix a little bit,” says Meyer of Wachovia. “These are incredibly important clients where we can create a strong, mutually positive relationship for all parties.”

Merrill has even taken some steps that will allow some middle-market accounts to get more attention than they might have in the past. By modifying its advisor-team structure to share revenues on certain clients, Merrill has paved the way, for example, for a senior broker to send to a junior broker groups of clients who aren't among his top 200.

“If your 200th client has $500,000, for those that are less, we don't want to give that to the center, so you give it to someone else in the office — the client is better served that way,” Mulholland says.

Brokers agree. Speaking at a recent SIA forum in Boston, Smith Barney advisor Mary Deatherage says it's smart to make sure that all clients — even the smaller ones — get personal attention from someone in the firm. Given that the alternative to farming the client interaction out is sometimes ignoring the client altogether, she doesn't feel bad about letting someone else step in, when necessary.

“If I'm not paying attention to them, I'm not doing them any favors,” she says.

In that sense, maybe what we're seeing in the focus on wealthy clients is simply an honest reassessment of priorities. Perhaps Wall Street firms cannot possibly be all things to all people and should concentrate on being all things to some people — leaving others to do the same for smaller clients.

Living Large

Average assets per rep at the large firms ($ in millions)

Firm Number of Reps Assets Per Rep
Merrill Lynch 13,400 $88.4
Smith Barney 12,317 67.7
UBS Securities 8,284 58.9
Wachovia Securities 11,625 48.9
Morgan Stanley 11,326 48
A.G. Edwards 7,345 31.9
Edward Jones 9,304 30.4
Source: Company reports. Assets-per-broker figure is calculated by dividing total client assets by the number of company reps.

Big Money Talks; Small Money Talks on the Phone

Perhaps he was just trying to be funny, or maybe there was a sudden outbreak of honesty when Rich Franchella, national sales manager at Prudential (now part of Wachovia Securities), said at a recent SIA conference that some Pru folks referred to the firm's national call center as the “national client cemetery.”

Call centers are perhaps the best evidence of large firms' customer segmentation strategies at work, and it should come as little surprise that “small” investors routed to them are all but dead to the advisors who once served them. In the early days of call-center-based advisors, they were an obviously second-rate way to deal with customers.

“Initially we did it wrong,” says Pieter van der Heide, a Merrill advisor based in New York. “You had all these clients, and we threw them down there, and many didn't know what happened.” Brokers at other firms say Merrill was hardly alone on this account.

However, things are improving with time. In fact, several large producers argue that the quarterly reviews smaller clients now get through call centers represent a net gain in attention. Bob Mulholland, head of Merrill's U.S. private client group, supports this view, saying his goal is to provide as much of an advisor-based experience as possible for call center clients. Merrill uses a team of seven dedicated to each client in order to breed familiarity.

Nevertheless, independent advisors doubt the big firms' ability to accomplish this. In fact, they sense a golden prospecting opportunity for advisors willing to service smaller customers face-to-face.

“Talk to Joe Client — ask him what he says,” says Mark Goldberg, president of Royal Alliance, a unit of AIG. “Do you want to call a call center, or see somebody local in your town who knows you, your wife and kids?”
— DAG, with additional reporting by Ilana Polyak