So much is written these days about the “war” between independent broker-dealers and wirehouses – mostly biased toward the “indies” winning – an article I recently read, which indicated that indie advisors have a much higher rate of client attrition, caught my attention. As it turns out, the discussion should be more about how an advisor has structured his/her business than what type of firm they are with.
Why do clients leave their advisors? According to a survey by Cerulli Associates (and quoted in InvestmentNews), many clients leave their advisors because of high fees, and at a greater rate at the indies. For example, again according to Cerulli, only 5% of wirehouse clients left their advisors over high fees last year, while 16% left independent broker-dealers and 20% left dually-registered advisors.
One explanation offered by Cerulli for this phenomenon is account size. Brokers at Morgan Stanley, Bank of America, UBS and Wells Fargo had about 24% of their business focused on customers with more than $5 million in investable assets last year, while just 3% of independent broker-dealers and 9% of advisors registered with both the SEC and Finra focused on accounts of more than $5 million.
To quote Cerulli: “Niche specialization helps advisors tell a more compelling story that demonstrates to the client how they receive value in exchange for the fees they pay. Clients who are not able to see this value will naturally be more sensitive to fees.”
So, what is the lesson here?
- While to Cerulli the link seems to be between fees and account size, I think that the real issue is the link between fees and how clients are educated/serviced. Successful brokers/advisors have a value proposition that resonates with their clients from their first interaction. This should be the case for small as well as large accounts.
- Client acquisition is expensive, so brokers/advisors should only work with clients that fit into their value proposition – clients that they and their organization are able to service effectively. Even if a practice targets smaller clients, which many do, client attrition should not be so high. This indicates to me a lack of front-end client education.
- Even smaller clients should fit into a “niche specialization,” so again I don’t think account size should be the excuse for higher client attrition.
- This survey has few implications in the indie v. warehouse tug of war because brokers/advisors have proven to be successful at a variety of firms.
At the end of the day, the Cerulli survey confirms the importance of advisors having a rational business plan in place and having a well-defined value proposition. Armed with these, fees or account size shouldn’t matter or be an excuse for client attrition.