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Online brokerages continue to take market share from the wirehouses, according to a new report by Aite Group, New Realities in Wealth Management. Combined market share of assets among the four wirehouse firms slipped 1.1 percent in 2009 and 2010, while online broker market share jumped 3.0 percent during the period, according to the report. Wirehouses now manage 38 percent of the wealth management industry’s $13.5 trillion in client investment assets, versus 19 percent for the online brokerages.

“It’s a real surprise and almost unbelievable,” Alois Pirker, an analyst at independent research firm Aite Group who co-authored the report with Aite’s Sophie Schmitt, told Registered Rep. “During the most stressful period of the recent credit crisis clients had lost trust in their advisors,” Pirker said. “The expectation was that the FAs would eventually regain their footing with clients. But there is no sign of that, no slowdown in the trend we are seeing.”

Still, the wirehouses remain the dominant—and the most productive force—in the wealth management industry. The typical book of business for an FA at these firms is almost $100 million. And FAs report optimism about the growth in their businesses. At the end of 2010, the four wirehouses (Bank of America Merrill Lynch, UBS, Morgan Stanley, and Wells Fargo Advisors) represented slightly more than 55,000 financial advisors and $5.2 trillion in total client assets, up from $4.8 trillion in 2009—9 percent growth.

“Competition from online brokerage is not something we are worrying about here,” said one big producer at Merrill Lynch who noted the positive reviews and growth in Merrill Edge. “My business is growing.” Since its roll-out in June, Merrill Edge has accumulated some $90 billion in assets. That’s still a far-cry from the $1.6 trillion at online heavyweight Charles Schwab, of course.

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The next biggest gainers of market share behind the online brokerages were independent Registered Investment Advisors, who saw their share of client assets grow 1.4 percent in 2009 and 2010, and regional brokerages, which recorded more modest gains of 0.8 percent, according to the Aite Group report. (An advance copy of the report, New Realities in Wealth Management: From Dusk ’til Dawn, which contains the results of Aite Group’s comprehensive survey of 438 industry-wide FAs conducted in the first quarter of this year, and slated for publication this week, was made available to Registered Rep.)

Sources of Growth

Pricing, technology and product improvements seem to have been the biggest drivers of market share growth for the online brokers. “The favorable pricing, paired with advanced technologies (e.g., mobile access) and increasingly sophisticated product capabilities, have helped online brokers to become a very attractive alternative for many investors,” wrote the authors of the Aite Group report. “Especially in times when many wirehouse firms are incentivizing their financial advisors to focus on high net worth clients, many mass affluent investors might feel that they get neglected by their advisor, and rather prefer saving the costs and leverage an online platform, instead.”

The authors of the report note that in a drive towards greater profitability, wirehouses have prodded their FAs with incentives to concentrate on their top clients. It’s a trend that makes some economic sense in light of regulatory changes such as a new fiduciary standard that will make advising clients more complex and therefore more expensive, the authors say. However, that trend could help the online brokerages make further gains in market share. “Unless alternative service models are put into place (e.g., Merrill Edge), these firms stand to lose their smaller clients to wealth management firms that are better equipped to serve these clients,” says the report.

Aite Group notes that the largely self-directed business model of online brokerage firms, with their low fees and the latest consumer technologies, such as mobile access to brokerage accounts and social networking, has gained traction among consumers. These consumers, mostly clients with less than $1 million in investable assets had become “disappointed” with their FAs during the financial crisis, Aite says. In many cases, such clients are not easy to serve profitably with an advisor-directed business model.
To be sure, the wirehouses have been developing their own social media approaches, rolling out mobile access, and in some cases, moving into online brokerage as Merrill Lynch’s Merrill Edge platform demonstrates. Indeed, Morgan Stanley, earlier this year began testing a pilot program that would allow its financial advisors to interact with clients and others on social media websites Twitter and Linked. Other wirehouses have also been wading further into social media. (See, Morgan First on Wall Street to Crack Social Media Code)
But Aite Group predicts that the migration of mass affluent clients to self-directed/online businesses will continue. In response, it says advisor-centric wealth management firms that want to remain strong in the mass-affluent space, will have to create ways to implement a multi-channel service alongside their advisor channel that permits servicing of clients through a cost-effective, modern platform.

At the same time, Aite said that while total assets managed at the online brokerages grew by around 50 percent in 2009 and 2010, the number of accounts grew by just 8 percent, or 2.4 million accounts, during this same period. “This confirms that while new clients are numerous at online brokers, a substantial amount of asset growth originates from the increasing wallet share of existing clients,” according to Aite.