engulfing Wall Street has made its presence felt in the wealth
management market, as the wirehouses find themselves fighting the
perception of an industry in chaos and the independent financial
adviser becomes the favoured channel. Charles Davis
reports.
Banner headlines trumpeting multi-billion dollar write-offs appear
daily, it seems: in the last few weeks alone, Citigroup has written
off more than $40 billion, UBS $38 billion, Merrill Lynch more than
$30 billion, Morgan Stanley $12.6 billion and Wachovia $7.3
billion.
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In addition, hedge fund meltdowns at Citi, UBS, Bear and Goldman
have caused tens of millions in losses among advisers’
high-net-worth clients. It’s not hard to trace the dissatisfaction
from the source, and it’s hard for the big investment banks to
avoid the taint, even if their divisions are blameless.
Unlike many debacles in the past, this time some well-known heads
were lopped off, from division chiefs to CEOs, including Merrill’s
Stanley O’Neal, Citi’s Charles Prince, and both UBS’ Peter Wuffli
and the firm’s chairman, Marcel Ospel.
Such news rolls downhill from the boardroom to the adviser’s
office, where worried clientele look past relatively healthy wealth
management numbers and wonder whether the entire sector is headed
for a fall.
It’s tough to poach wealthy clients when times are good, but now
registered investment advisers (RIAs) are swooping in and finding
that the weakened big brokerage wirehouses are no match for them.
Schwab Institutional, Fidelity Institutional Wealth Services and
Raymond James are all growing rapidly at the wirehouses’ expense,
in an era in which independent financial advice is proving a
winning sales pitch.
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By GlobalDataA survey by Fidelity of Americans with at least $1 million in
investable assets tells the tale: according to the survey, the use
of independent advisers grew to 26 percent this year, up from 22
percent last year. The survey also found that the percentage of
respondents’ investable assets held by independent advisers grew to
71 percent this year, compared to 56 percent in 2007.
While the wirehouse defections are a drop in the bucket
industry-wide, some of these relocations have captured the
headlines. Earlier this year, one of Morgan Stanley’s gems jumped
ship to start its own RIA with Schwab. Gurtin Fixed Income had been
with Morgan for nine years and manages $5.2 billion in client
assets, making it the largest RIA to join Schwab ever. Merrill
Lynch lost David Hou and Mark Sear of The Capital Strategies Group,
which manages $5 billion in assets and generates about $20 million
in annual production, to Schwab as well.
Time will tell, but the damage seems more spectacular in this
increasingly populist time when Wall Street is being blamed far
more often for the ills of the nation than in recent memory. In the
midst of a US presidential campaign in which candidates for both
parties have pilloried overpaid CEOs, the investment industry is
facing an uphill battle in restoring itself to the heights of
yesteryear.
Wirehouse brokers and advisers are emboldened by the plummeting
stock prices of their parent firms. The availability of technology
and products to independent firms has also levelled the playing
field, as RIAs have access to the same sophisticated product bells
and whistles of the wirehouses.
Underscoring the changing face of the market, Fidelity passed
Merrill as the largest financial services firm in the first quarter
of 2008, with $1.9 trillion of total client assets. Charles Schwab,
with more than $1.4 trillion of client assets, is right behind
Merrill.
The endless drumbeat of bad publicity from Wall Street has given
added resonance to the independent investment advisers’ freedom
from conflicts of interest, and the huge write-downs and numerous
scandals plaguing the wirehouses add fuel to the fire.
Perhaps nothing shattered the illusion of safety that once
enveloped the investment banks like the collapse of Bear Stearns.
Its sheer size gave a sobering message of vulnerability to an
already fragile mindset among wealthy investment banking clients,
and to the adviser base as well.
RIAs additionally appear to be winning the competition to lure
retirement assets, according to the management consultancy McKinsey
& Co. Its survey of consumer attitudes toward retirement and
financial firms found much higher levels of satisfaction from RIA
clients.
McKinsey estimates that independents, a category by its definition
that also includes independent banks, control 43 percent of
retirement assets. That compares with the 39 percent held by
conventional brokerage firms and the 18 percent held by insurance
agents, bankers and other financial companies.
The survey found that independents are winning so far because they
deliver advice simply.
As a result, almost half of clients at independents have
consolidated assets at those firms over the past three years, and
another third surveyed said they expected to do so in the near
future.
About 1,500 wirehouse brokers leave their firms and choose
independence each year, according to Going Independent, a report
that Seattle-based consultant Moss Adams prepared for Schwab. About
80 percent of them, the report estimates, sign on with independent
broker-dealers, while the remainder join registered investment
advisers.
It is worth remembering that the wealth management results of the
large US investment banks were quite strong compared to other
business segments, but there were signs in the first quarter that
the headwind from above was beginning to find its way down to the
private banking units as well.
Citi’s global wealth management division reported that revenues
increased 16 percent from a year earlier, but net profits decreased
33 percent to $299 million, largely because the unit set aside
resources to liquidate troubled hedge funds.
Citi injected $661 million to shore up the funds, but they are
still down 60 percent to 80 percent this year.
Merrill’s wealth management division also mixed record revenues in
the first quarter of $3.3 billion with an 8 percent year-over-year
decrease in pretax profit to $720 million.
Both wealth managements were bright spots for the firms overall,
but that’s a tough argument to make when the parent company’s
balance sheet bleeds red ink.
The brightest spot of all might be Morgan Stanley’s global wealth
management division, which reported a 6 percent increase in net
revenues year-over-year to $1.6 billion, and a 12 percent increase
in pretax profits to $254 million for the first quarter.
Morgan Stanley’s overall earnings were also better than expected,
reflecting a lone victor among the large investment banks.
The market downturn’s effects on wealth management can be traced to
the erosion of assets under management, compounded by lost market
value. Merrill, for example, brought in $4 billion in net assets,
only to see most of that erased by losses in the market. Smith
Barney suffered a net outflow of $1 billion during the quarter, and
Wachovia reported a 5 percent decrease in client assets from the
fourth quarter of 2007.
The wirehouses must stem the tide of defections to RIAs,
particularly in the face of a shrinking pool of top talent, Wall
Street observers say.
Adviser head count fell slightly over the past two years, according
to analysis by Cerulli Associates of Boston. Cerulli estimates that
the total number of financial advisers in all delivery channels in
2007 dropped to 245,831, down from 256,461 in 2006 and 256,569 in
2005.
In better times, advisers would lean on the equities markets to
close the gap, but instead, firms are being forced by the slumping
markets to park assets in money market funds.
Despite the positive long-term outlook for the industry, as
earnings fall the temptation will be to emphasize cost control.
This can be a much trickier proposition in wealth management than
in other divisions, thanks to the expectations of wealthy clients
for one-on-one service.
The question remains as to how long lasting the damage is, and how
permanent its effects. There is little question that the RIAs have
the upper hand for now, or that the wirehouses must break down
silos and reassure wealthy clients of their continued commitment to
wealth management.
