Wire houses are losing customers, assets, and, according to some analysts, their advisers as more affluent investors turn to independent channels for advice.
Ultra-wealthy investors are using registered investment advisers — including investment managers, independent advisers, and accountants — rather than wire houses like Merrill Lynch & Co. as their primary financial advisers, according to Spectrem Group, a Chicago research company.
A Spectrem study says that 38% of households with more than $5 million of assets use a registered investment adviser as their primary financial aide, up from 30% in 2001, and 33% put a wire house in this role, down from 37%.
Investors classed as “affluent,” with more than $500,000 of investable assets, are also working more closely with independent advisers, according to Spectrem. From 1998 through 2004, independent advisers have increased the wealth they manage for affluent people by 45.4%, to $1.6 trillion, the Spectrem data show, and wire houses have expanded the amount managed by 16.7%, to $2.8 trillion.
Ann C. Marhdt, a principal at the research company, said the recent bear market’s fallout has left affluent and ultra-wealthy investors “looking around” for advice from new sources. This gives independent advisers an opportunity to drum up business, she said, and also gives wire houses a chance to change their approach.
“We are seeing different types of advisers getting a lot of interest,” she said. “People like accountants are becoming primary financial advisers.” Wealthy people “are paying more attention” to where they seek financial advice. “They want to go to someone who sees their entire financial picture,” she said. “Some of these full-service brokers at wire houses previously were only interested in seeing their investable assets.”
Ms. Marhdt said some wire houses have started to adjust. Advisers at these companies are working to become qualified to take a more holistic view of people’s portfolios, she said.
“Investors and advisers are moving away from the transactional model of investing,” she added. “Advisers are no longer just interested in investable assets. They need to be part of the whole portfolio to maintain their roster of customers.”
Erik Hendrickson, a spokesman at Merrill Lynch, said the company is developing a culture of financial planning through its Total Merrill platform. In January 2003, it kicked off a campaign to promote Total Merrill as a retail account designed to appeal to banking customers by offering cash management and mortgage services.
More recent internal client polls indicate that satisfaction with financial advisers among households with $1 million to $10 million of assets is “near [an] all-time high,” Mr. Hendrickson said.
An executive at a discount brokerage house agreed, however, that wire houses are losing assets and advisers.
John Beatty, a senior divisional sales manager at the Schwab Institutional unit of Charles Schwab Corp., said wire houses have lost some wealthy people’s assets because of concerns about objectivity and conflicts of interest. Many brokers are leaving the wire houses, he added, to start independent financial planning firms.
This is not a new phenomenon, he said; it has gradually gathered force during the past eight years. The number of advisers leaving wire houses to become independent doubled in the past year, he said, and he expects another doubling next year.
“Brokers would like to move further. They want to go independent and be able to provide the best of breed products to their customers,” he said. “To do that they need to be independent, and more and more are moving in that direction.”
Schwab Institutional is among several companies offering a platform of products and back-office services to independent advisers. Bank of New York’s Pershing unit offers similar services. Schwab’s platform for advisers, which has about 5,000 adviser clients managing $365 billion of assets, is growing quickly as advisers leave other companies to become independent, Mr. Beatty said.
Merrill’s Mr. Hendrickson said his company has not experienced this trend. Turnover among Merrill’s most successful financial advisers is low, he said, and “we also continue to grow our advisory force. We hired 240 in the second quarter and more than 1,000 since 2003.”
The suggestion that customers are leaving the full-service model for registered investment advisers is misguided, Mr. Hendrickson said.
