Unlocking Real Value Blog

There’s been a lot of talk over the past few years over what the future holds for the wirehouses – Morgan Stanley, Merrill Lynch, UBS, Wells Fargo, etc. If the future is indeed as negative as many believe, what are the implications for advisors?

A recent report by Cerulli Associates, Inc. indicates that these firms will lose 7% more market share over the next three years; today their market share is 41.4%, and they are expected by Cerulli to lose market share more quickly than other segments (such as RIAs).

Here’s an interesting, yet often overlooked, part of the equation. While no one disputes that the wirehouses are losing advisors to RIAs and regional brokerage firms, a large percentage of this market share loss has occurred at the lower end – the wirehouses have been shedding these advisors both by choice (in order to increase profit margins) and to competitors.

The Cerulli report does not split the losses between these groups. The conclusion that these losses are a large negative for the wirehouses is conjecture at best in my opinion. While I believe that the wirehouses are losing some top producers, the situation is not as dire as many have concluded from this and other studies.

At the end of the day, there are certain advisors who will flourish at wirehouses and others who are more suited for either smaller brokerage firms or independent firms (which they either join or start). The case can be made that products and services offered to advisors might actually improve at the wirehouses as they’re able to focus on a core group of higher end advisors and their needs.

Whether an advisor flourishes or not depends mostly on his/her personality. Becoming an RIA is akin to becoming a business owner or partner, which would take some personality types out of their element. Likewise, some personality types will flourish under the freedom that is gained by leaving the restraints of the heavily compliance-oriented, less entrepreneur brokerage firms.

Neither type of firm is going away. An advisors ultimate success is less dependent on what type of firm they work for, and more dependent on them working in the type of firm that best suites their personality and skill set.

Our 4th Quarter Unlocking Real Value newsletter is out and features our latest White Paper: “Preparing for 2013 and Beyond.”

As 2012 enters its final months, it’s time to either start planning your marketing for 2013 and beyond if you haven’t done so yet, or, if you have, review your marketing plan to ensure that it remains on target.

The competitive landscape within financial services remains tough. Bad press continues to plague the industry, individual investors remain skeptical and the fiscal cliff looms.

Against this backdrop, successful planning is one of the best ways to hedge yourself and your business against the unknown, and to increase the odds that you’ll be successful. Your marketing plan must be detailed yet flexible.

For each section of your marketing plan, make sure that you:

• Detail specific activities;
• Identify the audience each activity is targeted to;
• Know who is responsible for each activity;
• Know how you’re going to measure success; and
• Are prepared to make adjustments if necessary.

This White Paper contains tips for helping you adapt to this changing environment as you develop or revise your marketing plan. As you go through this process, be sure that you have the time and resources to implement it without negatively impacting your business.

Click here to download the White Paper.

Many financial services firms remain conservative in their corporate spending, particular on marketing, even as the markets have improved this year, and for many, revenues are once again on the rise as part of their continuing post-financial crisis recoveries.

A recent study of asset managers, for example, found that most planned small increases in their marketing budgets even as revenue growth rebounds. The study covered firms of all sizes, ranging from $5 billion under management to +$100 billion.

Interestingly, however, the respondents in the same study also recognized the importance of branding and messaging, as they rated this the highest priority of any marketing-related category to invest in.

Why is branding and messaging so important? Because one thing that you must always do is promote the integrity of your firm. Especially during tough market times, and in today’s political environment where banks and financial services firms continue to get beat up in the press, reminding clients and prospects alike of your value proposition and why they do business with you must remain a top priority.

At the end of the day, all you or your firm has is its reputation. Protect it, promote it – always. Even if you are reducing your marketing budget, or your advertising budget, ensure that the money that you do spend helps your branding and messaging. It doesn’t have to be expensive – e-mail marketing systems and social media has made getting information to your target audience(s) a quicker and cheaper proposition.

Perhaps you need to think not so much about how much you spend in this area, but how wisely you are spending it!

Last week I blogged about a new report from PriceMetrix which highlighted that advisors who are aggressively transitioning to fee-based business performed better over the past three years, and grew their businesses faster, than slower-converting peers. Now I want to highlight a few more interesting findings from the report, which shed light on how fee-based business can fit into any advisor’s practice.

The trend toward fee-based business continues, but transaction business is not going away. Over the past three years, as reported by PriceMetrix, the percentage of industry assets in fee-based accounts has increased from 21% to 28%. While 91% of advisors have at least one fee-based account in their book of business, the still remaining overall high percentage of transactional business illustrates that fee-based business has a very long way to go.

In fact, only one percent of advisors have 90% or more of their client’s assets in fee-based accounts. The important point here is that while transitioning makes sense, and as PriceMetrix points out faster may be better, it would be a mistake for advisors to try to move all of their clients into fee-based business – don’t force business where it doesn’t fit. Having hybrid households (where clients have at least one transactional account in addition to one fee-based account) is becoming more the norm than the exception, and that’s okay.

The report also found that a large percentage of the increase in fee-based accounts came from new relationships, about two thirds. The implication here is that advisors might be wise to adopt a two-pronged transition strategy – one for current accounts, which might again result in more new hybrid relationships, and one for new relationships where there is no preconceived notion or expectations.

Finally, the report concluded that clients between the ages of 40 and 64 have the highest propensity to use fee-based accounts, and less experienced advisors tended to be more enthusiastic about fee-based accounts. This tells me that next year’s report might find younger clients migrating more to fee-based accounts, not only because their presumably younger advisors are advocating it, but also because of the proliferation of new model-based managed accounts, which has resulted in the lowering of account minimums in many programs, thereby making them more affordable to a younger demographic.

Casey Quirk, the U.S. Institute and McLagan just released a survey which indicated that larger asset management firms are having a harder time rebounding from the financial crisis than their smaller counterparts. (Larger firms are defined in the survey as managing more than $250 billion, medium-sized firms between $50 billion and $250 billion and smaller firms under $50 billion.)

The survey included 96 managers with more than $21 trillion under management, and concluded that revenues at larger firms are down 24% since 2007, compared to down only 4% at medium-sized firms and down 5% at smaller firms.

Coincidence or reality? Probably a little of both I think. There is definitely something to be said about the law/rule of large numbers – as in managing a large mutual fund, as your size grows it does become more difficult to perform well, as you are somewhat beholden to the whims of your investors/clients. And many larger firms offer multiple products, so at any one time some of these styles will be out of favor and inevitably experience outflows. Additionally, they may be hurt if they see clients going to lower-fee products – equity to fixed income, for example.

On the flip side, however, a smaller firm, which only has one or maybe a few strategies, has a viability problem if this style goes out of favor. What has favored many of these smaller firms lately is that that many are in “specialized’ areas such as alternatives and global products, which have been in greater demand as investors seek greater returns in a low-return environment.

Some might argue that medium-sized firms are in the best position, especially if they offer a diversified style mix. These firms would therefore not have the risk of going out of business because they are too dependent on one style that may be out of favor, yet they are more nimble than their larger counterparts and can react more quickly to any market “noise.”

At the end of the day, however, I think it’s too simplistic to say one size is better than another. You can have well run and profitable firms of any size, and you can have poorly run firms of any size. But it would behoove investors and fiduciaries to consider, among other things in their analysis, the size and asset mix of any firms that they are considering investing with so that they can determine for themselves if the firm is well positioned for future success.