Brooke’s Note: There are two basic schools of thought concerning the future of the wirehouses, i.e. Morgan Stanley, Merrill Lynch, UBS and the full-service brokers who work for Wells Fargo. One line of thinking is epitomized by wording I hear over and over from wary experts and executives in the RIA business: “These people aren’t stupid.” The message is that wirehouse executives, once their backs are to the wall, will use their mainframe computer brains in concert with their limitless ability to invest to toss the RIA business back into the obscurity from whence it came. There is another line of thinking that, critical mass and big brands aside, the wirehouses really have nothing to cheer about. See: The prognosis for Morgan, Merrill, UBS and Wells is even grimmer than the negative hype, Cerulli report shows. The big full service brokers are in a position where the Wall Street executives making the big decisions about the future of Morgan Stanley and the rest will find that no good deed in terms of embracing a real fiduciary model will go unpunished. It is simply more rational, given corporate thinking about quarterly earnings, to milk what they have and let some future executive worry about the day of reckoning. To clarify precisely how perilously close the wirehouses are to ceding to the second school of thought, I have consolidated thoughts from some RIA business thinkers about what wirehouses would have to do if they really, truly wanted to execute a turnaround of their gradually eroding franchises. What seems to jump out is how unlikely it is that any of this free advice will be taken.
1. Issue a formal apology for what happened in 2008 and 2009. If there’s anything Wall Street could use, it’s a fresh start and a rare show of humility. The history of corporate and public apologies in the United States, from Tylenol to Andy Pettitte, is consistently positive. It would be both more effective and less embarrassing for each firm if the apology were done with as many participants as possible and contained information about how the mistakes were learned from and what would be different going forward. Some of what could and should be different is mentioned in the ensuing points here. (Tim Welsh, president of Nexus Strategy LLC contributed thinking to this idea.)
2. Ban commissions. If anything would send a clear message that Wall Street is serious about turning over a new leaf, it would be this. The first wirehouse to get ahead of the no-commission game would have a field day with marketing. Right now, wirehouse advertising is virtually content-free, message-devoid and differentiation-laughable. This message would not only leapfrog many RIAs but it would jump over the Schwabs and Fidelitys of the world. Speaking of Schwab and Fidelity, these companies already depend very, very little on commissions for revenue, demonstrating that transaction fees may be more trouble than they’re worth. (Tim Welsh contributed thinking to this idea.)
3. Stop paying for recruiting. The practice of paying brokers and their teams giant bonuses to make an intra-channel move nets wirehouses in aggregate nothing. Even the not-so-smart telephone companies figured this out years ago. Remember when they used to poach each other’s callers by paying signing bonuses of $50 or $100? There were people who gamed this system mercilessly and there are brokers who do the same. Not only is no value added but it’s generally believed that the consumer pays the price. The advisor needs to hit certain production targets to be sure the bonus pays out fully. This puts unnatural pressure (beyond what’s there for any broker) to sell high-priced products, churn accounts and take other actions (such as questionable cross-selling) that tarnish the advisory practice brands in the long run. (Tim Welsh contributed thinking to this idea.) Philip Palaveev, principal of The Ensemble Practice, adds: Instead, use resources to develop the next generation of advisors and invest in their education and professional development. On a related note, he says: Wirehouses are suffering defections to a variety of models but many of the challenges are fueled by private equity and the challengers have yet to figure out what to do once they stop writing checks. In other words, the RIA channel may have its own unsustainable growth based on checks that may not get a return on investment.
4. Create an RIA custodial model — and don’t be afraid to recruit from yourselves. It is time to stop walking on eggshells around your brokers and let the chips fall where they may. Merrill Lynch, Morgan Stanley, UBS and JPMorgan either have or had active or semi-covert programs for the custody of RIA assets. See: In major reversal, Merrill turns away RIA assets. The problem with these programs is that they don’t serve their most natural markets — themselves. And because they operate under the cloak of darkness, they are hamstrung from being effective revenue generators. (Tim Welsh contributed thinking to this idea.) Along the same lines, Create a branded IBD. Create/replicate the feeling brokers have when they are with an IBD. There’s something about the autonomy that brokers feel when they are with an IBD that is different from the experience of working for a wirehouse. Replicating the emotional satisfaction a person has when they “own” a business, while at the same time giving them all of the benefits that the big brand has to offer is a big opportunity. Wells Fargo has been a pioneer of sorts in this area with FiNet, but even that effort has been tentative. (Charles Goldman, chief executive of Advizent, contributed thinking to this idea.)
5. Change the whole payout scheme. The wirehouses built their businesses based on a 40% payout. IBDs have raised that to 90% plus. The wirehouses are spending much more now on payouts, given the forgivable loan packages, but that may be an unsustainable strategy for the long term. (Charles Goldman contributed thinking to this idea.)
6. Give advisors a way to build an equity equivalent so they have something to sell upon retirement. When I attended an IMCA conference in Palm Desert, Calif., six or seven years ago, Bob McCann, head of Merrill’s retail brokerage business at the time, was a keynote speaker, and he was caught off guard by a question from a woman who was one of his brokers. She asked, with a purpose, what Merrill was doing to allow brokers to sell their practices when all was said and done. He talked about how things were being worked on. I know there are still brokers who leave wirehouses to monetize their practices. The brokers who stay may not have as big an incentive to build a practice with enterprise value knowing they won’t reap many rewards anyway.
7. Play harder to your strengths, People appreciate: brand, infrastructure, products (debatable about the quality) and resources such as practice management, technology, home-office oversight, home-office research and portfolio construction. (Charles Goldman contributed thinking to this idea.) And build on that to the good of the client. See: FRC report: Merrill Lynch, Morgan Stanley, UBS, Wells Fargo are undergoing a radical transformation to a brighter future. See: 7 reasons why wirehouses shouldn’t milk the old business model.
8. Get smaller. Senior management at the wirehouses are not wealth management people. Rather, the wirehouses have become giant financial service monoliths that are in many, many businesses and geographies beyond U.S. wealth management. In the old days, the wirehouses were wealth management shops. Now wirehouse reps have to deal with all of the things that go on at their firms that are outside of their control. Worse, their long-term comp and stock has much more to do with the proprietary book at the bank than how well the wealth management business does. Finally, the folks in charge of those business segments — with whom the reps interact — don’t have power, and the reps know it. (Charles Goldman contributed thinking to this idea.)
9. Drive toward better client outcomes. This will take time, but continuing the momentum toward fee-based relationships, limiting conflicts by taking less/eliminating revenue share by choosing low-cost products, and adopting a fiduciary standard (note I didn’t say The Fiduciary Standard), all will make the rep experience better, because the client experience will be better. (Charles Goldman contributed thinking to this idea.)
10. Encourage and brand superstar teams. The line between wirehouses, large platforms such as Dynasty Financial Partners and HighTower Advisors, consolidators such as Focus Financial Partners, LLC and United Capital Financial Advisers, and even large, multi-office RIAs will only blur going forward. The strength of a firm is defined by the strength of its people and its culture. Firms (not just wirehouses) will succeed if they can attract and retain the best advisors and surround them with a culture that encourages them to pour their hearts and minds into what they do. Encourage the formation of teams within the firm, promote examples of successful teams — not just superstar producers. Explore the opportunity to brand the teams along the with the national brand (e.g., “Southall team of Merrill Lynch”) and look to create compensation structures that give team principals control over the hiring and compensation of their team members. Rethink the role of the branch manager and the branch infrastructure in general. (Philip Palaveev contributed thinking to this idea.) See: Merrill Lynch springs a 62-advisor, $13 billion asset leak in the first quarter.
Final Note: Both Palaveev and Goldman noted that — their suggestions notwithstanding — they are pretty sure the wirehouses aren’t in any real trouble.