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Full-Service Brokers Losing Hold on Affluent


Full-service brokers made something of a comeback in the past year, but it remains to be seen whether they truly have ended the erosion of their market share as primary advisers to the affluent.

Research that our firm, Spectrem Group of Chicago, has done shows that 31% of affluent investors used full-service brokers as their primary advisers last year, a substantial increase from 24% in 2004. This is a significant improvement for full-service brokers, who saw their market share of the affluent market cut nearly in half from 2002 to 2004.

Affluent investors, defined as those who have at least $500,000 in investable assets, gave full-service brokers a commanding lead over other types of primary advisers in 2005. Full-service brokers ranked ahead of investment advisers (17%), financial planners (14%), investment managers (10%), accountants (9%), discount and online brokers (7%), trust officers (2%) and private bankers (1%) - all of whom had gained market share at the expense of full-service brokers in the previous two years.

For the moment, full-service brokers can breathe a little easier. Still, they must deal with the fact that their share of the affluent market is only two-thirds of what it was in 2002. Whether the recent improvement is the result of enhanced services or market performance, it's clear that full-service brokers must continue to work hard to meet the needs of affluent investors.

Historically, full-service brokers have dominated the market as primary advisers to the affluent, and to some extent, they still do. But that has been changing. Little by little, market share has shifted to independent advisers, financial planners, investment managers and discount and online brokers.

As recently as 2002, full-service brokers held a 45% share of the affluent market. No other type of financial services professional held even half as much. By 2004, however, brokers saw their lead over investment advisers dwindle to six percentage points and over financial planners to seven percentage points. And while full-service brokers were losing nearly half of their share of the affluent market, three types of professionals - investment advisers, investment managers and accountants - doubled their respective shares.

These developments have been driven by a growing demand for holistic advice and a loss of trust and confidence in full-service brokers. In the past, full-service brokers focused solely on their clients' investable assets, but today, wealthy investors are looking for assistance with all aspects of their financial lives. Meanwhile, full-service brokers faced a loss of client confidence in the aftermath of media reports of conflicts of interest and other ethical lapses in the financial services industry.

More than one-third (38%) of affluent investors say they no longer believe full-service brokers are acting in their best interests. It's no surprise, then, that many of the affluent have decided to forgo full-service brokers for specialists in their search for unbiased advice.

Another recent Spectrem study, of pentamillionaire's use of advisers, underscores the significance of these developments. Today, 30% of pentamillionaires use a full-service broker as their primary adviser, down from 41% in 2001. Among those younger than 50, only 26% use a full-service broker. And of those who use a primary adviser, 73% rate them as less than excellent. Sixty-five percent of those who use independent advisers say they intentionally avoid advisers who are affiliated with a brokerage, bank, insurer or mutual fund company, and 50% say they use independent advisers because they give them more objective advice.

These findings are a wake-up call for full-service advisers, indicating that the wealthiest Americans are questioning the objectivity and performance of their brokers, as well as seeking more independent financial advice.

A number of full-service brokers have taken note and are making changes that they hope will restore trust and win back clients. For instance, some have deemphasized proprietary products and services, which signal to investors not only limited choices but also the potential for biased decision making. Others have toned down product pitches and have begun initiating conversations with investors about what they really need. And many brokers, recognizing the growing demand for holistic advice and wanting to position themselves as being sensitive to clients' needs, have started offering a range of expert advice for every stage of their clients' financial lives.

Those and other efforts have definitely contributed to full-service brokers' recent increase in popularity among the affluent, but the lag in client satisfaction levels indicates that these advisers still have room for improvement.

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