More, More, More

Faced with growing competition from other advice providers and fewer inherent advantages in the way of products and platform capabilities, wirehouse brokers will feel pressure to do more fee-based business and to make wealthier clients a bigger part of their practice. So for wirehouse reps that are still locked into a transactional business, grossing at or near their firm's break-even production (between $200,000 and $250,000 at most wires) and putting off those CFP exams, they must get better or find another job.

“Increasing revenue per financial advisor is a major focus,” says Norm Nabhan, head of Smith Barney Consulting Group. His firm is certainly not alone in applying pressure. Traditional revenue drivers like trading and proprietary product are fading into the background. Consequently, wirehouses want more for the money they spend on compensation to reps — roughly 50 percent of total revenue. To play on the team, firms are asking reps to convert their books to fees (33 percent of industry revenue and rising, according to the SIA's most recent data) and focus on fewer but wealthier clients in order to offer better service and to become more efficient.

The signs are everywhere: As part of its restructuring and focus on high net worth, Morgan Stanley laid off 1,000 reps with eight or more years of service and $225,000 or less in production; Smith Barney recently cut payouts for sub-$250,000 producers with six to eight years of experience, as well as those doing less than $300,000 with nine-plus years at the firm; Wachovia also recently shaved payouts for low-end reps; and Merrill Lynch, the leader in revenue per FA and average assets per FA ($726,000 and $95 million, according to Merrill research analyst Guy Moszkowski) has said it continues to look for more $500,000 producers.

Recently reported figures from the SIA suggest these rising expectations are having the desired effect: In 2004, average production per rep increased 12 percent to $418,000 from $373,000 in 2003, and while the average branch size remained about the same (generally, 13 reps, five sales assistants), average gross production per branch was $6.08 million, up 17 percent from $5.2 million in 2003. Additionally, average assets per rep were $73 million in 2004, a 27 percent increase from $58 million in 2002.

Seeking Wealth

Dennis Gallant, an analyst with Boston-based Cerulli Associates, says the firms know what their problem is and are responding by segmenting clients: “They have these huge sales forces. They just need to match all the advisors up with clients based on advice and service needs and affluence,” he says. Because a planning-and-advice-driven practice requires more time spent on each client (doing financial plans, etc.), it requires advisors to focus on more profitable (wealthier) clients. Observers like Gallant say that the use of call centers (currently in use at Merrill Lynch and Morgan Stanley for accounts with less than $100,000) is the kind of segmentation that firms likely need to continue to do in order to free up more advisors from smaller client relationships.

But since the wealthy are in high-demand and short supply, filling out practices with well-heeled clients isn't going to be easy. “The top 20 percent of reps at the wires are doing great for their firms with those clients. It's the bottom 80, the mid-tier reps, what do you do with them?” asks Gallant. There are roughly 300,000 people working as advisors in the country (although there are far more people with Series 7s), according to Cerulli. And, according to the CapGemini/Merrill Lynch World Wealth Report, there were 2.5 million millionaires in the U.S. last year. Acknowledging that not every one of those advisors is pursuing millionaires, it still isn't a lot of business to go around. “Advisors in every channel moved upmarket this year so it's becoming a very crowded marketplace,” says Gallant.

Adding to the challenge of finding rich clients will be finding (or creating) and keeping reps that know how to serve them. Wirehouse rival Lehman Brothers' problems finding top talent illustrates this. Lehman has 472 brokers averaging $2 million in annual production, according to a Morgan Stanley research report. But while Lehman Chief Executive Richard Fuld had originally planned to increase his broker force of 1,000; he recently backed off that prediction, saying that finding that caliber of rep with connections to wealthy clients was “tougher than I had hoped.”

Indeed, bidding wars among wirehouses for top producers have reached near record levels in terms of recruiting packages and have been costly for firms. Meanwhile, training, constantly ridiculed for failure rates as high as 80 percent after a few years, isn't considered a great option either, especially since you it's not possible to put a young wealth manager trainee on the phone after six months. “The firms are trying to tackle that with teams,” says Mark Tibergien, a principal with Seattle-based consulting firm Moss Adams. Firms are also encouraging reps to up their skill set: Merrill Lynch reimburses reps for expenses related to getting their CFP, and Smith Barney recently announced they will do the same.

Another challenge for the wires is that they are no longer the keepers of the research/product toy box, once a big differentiator for the big firms. Clients who had to go to the full-service firms for product variety don't need to anymore with improvements in technology and the growth of third-party platform providers. Open-architecture, partially the result of directed brokerage scandals but also a component of the move to an advice-centered model, has made access to products like hedge funds and private equity easy for everyone.

Repairing Reputations

The wirehouses, battered particularly in the past few years by scandals and newspaper headlines about conflicts of interest, also have the dilemma of trust to deal with. “National brand is still a big draw for most investors, it's recognizable, but in the past few years when people look to the evils of the industry they focus on the prominent names,” says Moss Adams' Tibergien. Despite this he says advisors at wires still have the upper hand “if they simply focus on carving out a niche for themselves within their firm and then leveraging and communicating to clients the superior support and resources that a massive platform provides.”

Evidence that other channels are making moves in their territory should be enough to jumpstart most wirehouse advisors. Recent studies of the affluent market show the independent world is making strides. In a 2004 survey, Spectrem Group, a Chicago-based research firm, found that while full-service brokers were more often the primary advisor for the $1 million-to-$3 million segment, independent financial planners had a slight edge in the $3 million-plus segment.

But while market share is difficult to determine given the number of entities providing financial services, one thing is clear, the wirehouses maintain control of a massive chunk of investor money: Merrill Lynch, Smith Barney, Wachovia, Morgan Stanley and UBS collectively have about $4.3 trillion in client assets under management as of the third quarter of 2005. One top Merrill Lynch advisor scoffed at the suggestion that RIAs and independent broker/dealers posed a growing threat: “Whatever the surveys say about the wealthy going to RIAs, it's nonsense,” he says. “Merrill Lynch private bank brought in 700 net new $10 million accounts this year. The independent world isn't gaining on us — show me one RIA with a business as big as mine, growing as steadily as mine. You can't.”

Channel Comparison: Advisor Product Mix, 2004 and 2005

Wirehouses continue to do a big business in individual securities and mutual funds but ETFs and separate account usage continues to grow. According to Cerulli, separate account growth is likely the result of more advisors becoming fee-based and using managed accounts to do so.