The breakaway broker trend is not taking over the world, as the independents would want you to believe, Tiburon Strategic Advisors managing principal Chip Roame said during his keynote presentation at the Tiburon CEO Summit in New York City Tuesday. “Everyone is not leaving Merrill, and stop making that up. It’s utterly not true.” The wirehouses lost $90 billion in assets last year, but that’s just a small piece of the pie when you consider the channel has $5 trillion. “That’s a trickle. I left my faucet on faster than that this morning.” But Roame believes the data is skewed. Some data sources count assets that left the independent broker/dealer channel as breakaways, while others count going from a wirehouse to another wirehouse. In reality, it should be more like $64 billion that left the wirehouses, Roame said.
Despite the hype around the breakaway broker trend, it’s more about bodies leaving the wirehouses than it is money, Roame said. Wirehouse advisors still have the biggest books. On average, wirehouse FAs have about $90 million in assets, versus $20.5 million for independent reps. Overall, the wirehouse channel still holds 57 percent of industry assets, Roame pointed out.
Many financial advisors remain in the dark about their clients’ use of self-directed accounts, or maybe they’re just in denial. Eighty percent of clients say they’re using a self-directed account, while only 20 percent of advisors say their clients have these accounts, Roame said. “Hello, earth to advisors.”
Roame pulled up a list of the biggest money managers by assets under management. BlackRock was at the top of the list, with $3.8 trillion in AUM, followed by Allianz (PIMCO), with $2.1 trillion, and State Street Global Advisors, with $2 trillion. Vanguard and Fidelity were also high on the list. What do they all have in common? They all specialize in either low-cost, index, or fixed income funds.
When you look at flows to separately managed accounts relative to mutual funds and ETFs, it’s not a pretty picture, Roame said. While flows to SMAs are now positive and used to be negative, they’re still really small compared to mutual funds and ETFs. “You cannot argue separate accounts are doing well right now if you live in the relative world. Their flows suck, let’s be clear.” Nuveen Investments, however, is one SMA manager bucking the trend. The firm has grown its assets from $115 billion in 2005 to $220 billion last year.
While baby boomers may have a lot of money, the highly-anticipated wealth transfer from their parents just hasn’t materialized as some expected, Roame said. The real estate planning revolution will happen in about 15 years, as the oldest baby boomers start transferring assets to their children.
Custodians are doing quite well, Roame pointed out, even second tier firms such as TradePMR, Scottrade and National Advisors Trust Co. (Natco), which recently hired a new CEO. While Schwab, TD Ameritrade and Fidelity still lead the industry by number of fee-based advisor clients, TradePMR is not too far behind with 1,370 advisors. Scottrade now has 1,100 advisor clients.
A year or two ago, everyone was touting tactical asset allocation, saying strategic allocation, or buy-and-hold, was dead. “You know what, if you were a tactical asset allocator the last several years, you stunk,” Roame said. “They were 100 percent wrong, but no one mentions that.” But in the midst of the tactical buzz, REP. magazine did, in fact, question tactical’s legitimacy in its December 2011 cover story, “Is Tactical Investing Wall Street's Next Clown Act?”
Should private equity firms place their bets on the producers of financial products, or the channels that get them into the hands of consumers? In one sense, a rise in passive investment products shifts profits to the distributors, according to Roame. "Bet on the channel, not the product. The guy closest to the client always wins."
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