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Wirehouses Scramble as Advice Goes Independent

Financial advisers have been going independent or switching wirehouses in record numbers since the economic crisis began at the end of 2007, and brokerages are scrambling for ways to get them and their loyal clients to come back.

Large wirehouse firms lost 2.1% of the total market share in 2008, or almost $225 billion in client assets, according to a new study by Aite Group, titled "New Realities in Wealth Management: Ready for the Sea Change?"

The top three-Merrill Lynch, Morgan Stanley and Smith Barney-lost a combined $150 billion, Aite said. In 2008, the total number of financial advisers employed by wirehouses dropped by 5,994. The biggest loser was Merrill Lynch, which lost 2,868 advisers, followed by Smith Barney, which lost 2,795.

During this transition, teams of breakaway RIA custodians gained 1.1% of the total wealth management market, with Charles Schwab capturing more than half of this business. Fidelity Investments garnered 25%, Aite said.

While most advisers have been playing a game of musical chairs by moving from one wirehouse firm to another, Aite found that independent registered investment advisers (RIAs), independent broker/dealers and online brokerage firms have continued to gain market share.

"Our market data suggests a significant shift toward both the independent advice model and use of self-directed brokerage platforms," said Douglas Dannemiller, a senior analyst with Aite. "As a result, the independent broker/dealer and registered investment adviser segments have both gained market share at the expense of the dominant wirehouse firms."

Independent and regional broker/dealers added 3,000 financial advisers in 2008, Aite said. Half of them went to Edward Jones, while LPL Financial and Ameriprise Financial each hired 540 advisers.

The independent RIA space has shown steady growth since the dot-com bust, Aite said. During the recent financial crisis, RIA custodians continued to collect assets from breakaway brokers at an average rate of 1.8% annually.

"While nearly all wealth management firms have been confronted with sharp drops in client assets due to the market crash, those firms that have been able to attract new advisers have been able to replace a significant share of these assets," said Alois Pirker, a research director with Aite Group.

According to Discovery Database, 5,650 representatives changed firms in the second quarter of 2009. Nearly half of these movers were from wirehouses, 14% were from the institutional space and 13% were independent. Of the 2,712 wirehouse reps who changed firms, 42% stayed within the same channel, but switched firms, Discovery said. Approximately 17% of wirehouse reps moved into the independent channel in the second quarter.

"Firms that long dominated the wealth management space have seen thousands of advisers and billions of dollars in client assets leave their firm over the past few quarters alone," the Aite report said. As a result, wealth management firms are being forced to rethink their strategic planning and reduce overhead in order to remain competitive.

An easy way to trim costs is to cut out low-producing advisers, Pirker said, but most firms have already done this and are running about as lean as possible. Firms would love to raise fees to cover their revenue shortfall, but doing so raises the risk of losing even more clients and their assets.

Overexposure to investment banks led to billion-dollar losses among the top wirehouses, resulting in several high-profile mergers and acquisitions. In the past year, Merrill Lynch merged with Bank of America, Morgan Stanley and Citi's Smith Barney joined to become Morgan Stanley Smith Barney, and Wachovia Securities merged with Wells Fargo to become Wells Fargo Advisors. UBS Wealth Management USA is the only major wirehouse still intact, but it has since fallen far behind the leading three wirehouses and a future merger is possible, the Aite study said.

All this restructuring is stressful and confusing to advisers and their clients.

"Many advisers are leaving because they feel they're not in an environment where they can grow their practice," Pirker said. "Lately, they are seeking to join firms that haven't been getting bad press."

And investors have become more receptive to smaller, independent firms, saying the cachet of a well-known name no longer holds so much weight, and that they are looking for the personal attention and customer loyalty a fee-based independent adviser can give them.

When advisers go independent, they take an average of 60% of their client base with them, Pirker said. The top advisers take between 80% and 100% of their clients.

"If the number of registered representatives switching firms continues at the current pace, funds will have to expend more time and effort tracking down their best producers and searching for new prospects," said Frank Polefrone, senior vice president of Access Data. Even independent advisers will need technical service and support, and those firms who are best positioned to identify, track and service these reps during their transition will gain valuable market share, he said.

Firms that want to survive should try to understand this new business model, said Cathy Angellis, director of product marketing at Access Data.


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