Big Four Wirehouse Advisory Practices Are All Retooling Pay and Jettisoning Their Least Productive, Cerulli Says

The largest wirehouses will be "trimming off" their least productive advisors and offering many others retirement packages over the next five years, Scott Smith, a Cerulli associate director told eFinancialCareers today.

That's why Cerulli believes headcount at Morgan Stanley Smith Barney, Bank of America Merrill Lynch, Wells Fargo Advisors and UBS AG will decline by some 6,800 advisors by 2016.

The number of advisors employed by the four financial advisory films cited above fell from 56,901 to 50,742 from 2007 through the end of 2010. (The headcounts exclude the Merrill Edge platform, which serves customers with less than $250,000 in assets, as well as Wells Fargo's independent advisory unit, Finet.) New research from Cerulli Associates also shows that the wirehouses' share of retail assets under management fell from 49.7 to 42.8 percent over the same time periods, Smith says.

Are these big banks really pushing people out the door? In many cases, the answer is yes, says Smith. Growth in the independent advisor model is part of the equation, he acknowledges. Yet the bigger trend he sees is that the big firms are working hard to revamp their compensation structures to see to it that their advisors "either become more productive right away, or find another firm where their productivity will be more appreciated."

Investment News reports, for instance, that Morgan Stanley CEO James Gorman has said that he is determined to raise wealth management's pretax profit margins all the way to 20 percent, and as such, the firm has made changes to its advisor compensation grid-raising the penalty box threshold from $250,000 to $300,000 for lower-producing advisors. Those who don't meet the new production targets will see their payouts drop to 20 percent, according to the report.

Morgan Stanley's global wealth management group was able to raise pre-tax profit margins to 11 percent from 9 percent in the third quarter, at a time when its FA headcount declined by 300 due to efforts to cut lower-end advisors, Morgan Stanley Chief Financial Officer Ruth Porat stated when the company's earnings were reported last month.

Compensation is tightening "across the board"

Smith says it's not just Morgan Stanley that's making these sorts of changes in their compensation structure-increasingly, they're happening "across the board," as wirehouses become less interested in those producing only $200,000 to $300,000 or so in annual revenue.

The Cerulli executive-who based his comments on new research the firm released roughly two weeks ago-says that UBS had an advisor head count of just 6,800 late last year and wants simply to employ only the most stellar wealth management performers, whereas MSSB has over 17,000 advisors and also wants to reduce duplication of effort region-to-region.

Clearly, the wirehouses have lost market share to independent advisor channels of late. Cerulli finds that while wirehouses were losing some asset gathering steam between 2007 and 2010, those making the biggest gains in asset market share were independent broker-dealers-now with a 17.6 percent market share-Registered Investment Advisors, with a 16.9 percent share, and regional broker-dealers, at 14.8 percent.

Perhaps 20 percent of those who exit the wirehouse channel over the next five years will be so-called breakaway brokers who leave of their own volition, says Smith.

For those with an independent spirit, it's never been easier to make such a break, he says, adding that mid-to-higher tier advisor technology has lowered the bar to going independent and that the wirehouse desktop system is no longer the "gold standard" it once was.

Nevertheless, he concludes, at a time when so many advisors are in their mid-40's and early 50's, he believes that the lion's share of advice givers will be leaving wirehouses either because they're retiring or being otherwise forced out.

If you ask Robert Wolfe, managing director for the South Florida Region of wealth counseling firm United Capital Financial Partners, it's likely that some good advisors didn't hit their stride because they were uncomfortable having to market proprietary wirehouse products that throw off more revenue. Some advice givers will simply pass on that opportunity, he says.

Wolfe's firm is now in the process of recruiting individual advisors as well as fuller-scale businesses and bringing them under his company's wing.