The financial meltdown of the last 18 months may be easing, but the crisis continues to impact the wealth management industry.
A report by Aite Group, "New Realities in Wealth Management: Has the Dust Settled?," says that, though financial advisers expect this to be a great year, wire houses are still feeling the turbulence, and breakaway brokers, though waning, are still a concern.
Alois Pirker, research director with Aite Group and co-author of the report, said in a phone interview Monday that a post-recession spike in confidence is common, and the ones whose outlook improves the earliest will reap rewards earliest.
Even though independent registered investment advisers are the most confident segment of the financial industry, according to the report, some — especially wire-house brokers — remain cautious.
"The market-share carousel is still turning as we speak," Pirker said. "We see firms gaining traction just by being bold in a crisis situation by onboarding clients and being confident about their business," he said. "I think 2010 will be a pivotal year where we see some gaining substantial market share and traction and some losing because they haven't moved into growth mode early enough."
According to the report, on average, wire-house brokers predict revenue growth of 13.4% from the fourth quarter of 2009 — when the survey was conducted — to the fourth quarter of 2010, while other industry segments expect much stronger growth. The independent RIA channel expects revenue growth of 24%. Fifty-two percent of RIAs said they expect production to rise more than 20%; only a third of wire-house brokers expect such an increase.
If growth expectations are met, this is bearish news for wire-house firms, who would have lost market share for a third straight year. The report's conclusions should not come as a surprise to wire houses, which have been restructuring since last year, mostly because of an increase in mergers and acquisitions.
To succeed, wire houses need to retain their most productive financial advisers and to hire top producers, according to Aite. That strategy appears to be working somewhat; with a focus on retention packages and lock-in contracts, the trend of breakaway brokers has slowed from the high levels of early 2009.
Despite such inducements, 85% of advisers surveyed by Aite said there is some likelihood they will break away. Twenty percent said it is more likely than not that they will break away.
In a press release, Pirker said: "While the situation at wire houses has certainly stabilized over the past year, our survey shows that only 15% of wire-house advisers currently have no plans to break away from their employer. While switching firms has slowed in the last couple of quarters, a large share of wire-house brokers is prepared to jump ship should their firm take another reputational hit. Even as positive market performance restores stability, the major players in the industry continue to face serious competitive threats."
Pirker said in the interview that what most surprised him about the report's findings is that, though many in the wire-house channel believed that all firms' book of business declined, there were a substantial number of firms that gained 20% in their book of business.
What differentiated the firms that gained from those that didn't, Pirker said, was "the ability to work with clients through the crisis and to be there in every stressful situation.
The ones who are top-performing and confident in their ability to help clients are ultimately more convincing with the client."
Ultimately, there were winners and losers in every channel. "The channel alone doesn't determine your growth perspective," Pirker said.
But it's clear the channel gained substantially. From the end of 2008 to the end of 2009, RIAs gained $350 billion in assets as a channel, taking 1.5% of market share in 2009 alone. One reason: RIAs have the fiduciary standard on their side.
Nonetheless, the number of RIAs dropped in 2009, because some sold their practice to bigger firms and others retired. "While there are inflows to the RIA channel, there is consolidation going on as well," Pirker said. "Those who haven't done as well sold in 2009."
