I was asked to write an opinion piece in FundFire about recent developments that seem like another slap in the face to wirehouse advisors by their own companies. Here is the text of the piece:
Last week’s Fundfire article about Merrill Lynch and Goldman Sachs letting a limited number of registered investment advisors (RIAs) tap their research capabilities raised some hackles.
It also raised some questions: Is this another blow to financial advisors working at wirehouses, regionals and other traditional broker-dealers? Should these advisors feel slighted that some of their competition is now going to have access to resources that were heretofore considered to be a competitive advantage? And rightly or wrongly, will it accelerate attrition of wirehouse advisors?
Personally, I don’t think so. Sure, one could argue that the firms are arming the competition with some of the same weapons their own advisors have at their disposal. But at the end of the day, high-net-worth and ultra-high-net-worth clients select their advisors based on relationships more than individual products. It would be a stretch to think that client relationships would be endangered by this move alone. In fact, large broker-dealers could use it to their advantage by pointing out to clients and prospects that their firm conducts such good research that many of their competitors value it.
Building and maintaining a top-notch research infrastructure is expensive, and frankly, out of reach for most RIAs and other independent advisors. This is the case for both traditional investment research as well as alternatives, which have become increasingly popular as clients search for income and return in today’s investment environment. Especially as the breadth of product offerings continues to expand, when it comes to sophisticated research, “building it yourself” becomes harder and harder, even for firms of substantial size.
From an RIA’s perspective, partnering with a wirehouse can bring instant credibility, since clients are more apt to have heard of large broker-dealers than they are of the many smaller, newer turnkey providers offering similar products. Even though their reputations have taken a hit since 2008, Merrill and Goldman are still big names.
So why shouldn’t Merrill Lynch, Goldman Sachs and other large broker-dealers look for ways to increase distribution and therefore the profitability of these areas? Especially in Merrill’s case, it’s perhaps partly a recognition that the number of advisors moving away from the wirehouses and other traditional broker-dealers continues to grow. More advisors are going independent, and wealth management firms need to go where the distribution opportunities are. Outsourcing investment research is an opportunity to boost revenue.
This is not to say that the wirehouses won’t continue to be a force in the industry, because they will. According to Cerulli Associates, wirehouses will still control more than a third of the assets in the advisory market at the end of 2014.
Additionally, there are many differences between RIAs and independents on the one hand and traditional broker-dealer advisors on the other. The former are running their own businesses in addition to providing financial advice. This is a huge undertaking. Wirehouse advisors do not want the hassle of the day-to-day minutiae of running a business – they just want to concentrate on their clients.
There are myriad issues that make an advisor leave his or her firm and go independent. It’s unlikely that advisors will be sufficiently angered by this alone to jump ship.
Advisors have gotten mad at their own firms in the past; for example, the uproar last year at Merrill Lynch when Bank of America tried to increase pressure on cross-selling. That to me was a more significant issue that this research one, and I don’t think that caused a significant run for the exits.
All in all, this issue of outsourcing investment research capabilities seems to be nothing more than a natural development in the wealth management business. While a few advisors might feel that their employers are slighting them, both the traditional broker-dealer firms and the RIAs have the potential to benefit.