Financial Services Research Firm Says Wire-house Wealth Managers’ Focus on Profitability is Backfiring

Wealth managers are finding additional reasons to consider moves to independent or to direct-selling discount firms like Fidelity.

Decisions made by wire-houses—such as employing only the most productive financial advisors, increasing their revenue sharing fees and focusing on high net worth investors—may be causing them to forsake long-term domination of the advice space for short-term profit, says Boston-based researcher Cerulli Associates, who goes on to assert that big banks’ profitability focus may be falling flat.

“The most productive advisors serve the wealthiest clients, and wire-houses have been cutting payouts for those advisors who take on new clients with less than $250,000 in investable assets," says Cerulli. "But by not actively attempting to address clients under a certain asset threshold, wire-houses will inevitably lose some share to those providers willing to work with these investors.”

"Traditional discount broker-dealers have been expanding their advice services in recent years, and these firms have benefited from the trimming of smaller clients by the wire-houses," adds Cerulli associate director Katharine Wolf.

In other words: "Fidelity, Schwab and other direct providers are reaching up market to address investors who have fallen out of the redefined sweet spots of wire-houses," Cerulli’s Scott Smith tells eFinancialCareers.

“Registered Investment Advisors (RIAs) have also been active in addressing investors below the highest wealth tiers, by designing their client service segmentations to provide services that address the core investment and financial planning needs of the market often with limited face to face interaction,” Smith adds.

Meanwhile, as illustrated by continued market share losses for the wire-houses, consumer distrust and dissatisfaction with big-bank advice givers continues to linger. “Investors who name the wire-houses as their primary provider were the least likely to be satisfied with their provider,” Cerulli reports.

As we recently reported, wire-houses are losing high net worth (HNW) investors. At year-end 2008, these firms held an estimated 56 percent share of the HNW market, but this dropped to 47 percent at year-end 2009 and has continued to slide to an estimated 45 percent at year-end 2011. By 2014, it’s expected that their share of the high net worth market will be a total of just 42 percent.

In the past, Cerulli says, wire-houses have also been in the driver's seat when it comes to revenue sharing agreements, and they have been increasing their "pay-to-play" fees for years, says Cerulli, observing, “The minimum charge for Morgan Stanley Smith Barney's platform is now $250,000, up from $50,000 in 2009.”

While this solves wire-houses' short-term profitability concerns, it is causing asset managers and product providers to reconsider how they spend their distribution dollars and resources, says the research firm.

"Although the wire-houses have actively put forward a profitability focus, this strategy assumes that they are effectively retaining high-end advisors and affluent investors," said Cerulli Director Bing Waldert. The shift in market share among HNW investors suggests that “they were not successful at either," Waldert says.