Finding greater advisor satisfaction at the wirehouses, Cogent study concludes the breakaway surge is over

The great migration of advisors from wirehouses to independence is ending, says an ambitious study by Cogent Research that measures advisors’ outlook and their plans to shift channels.

The Cambridge-based firm used the considerable research in Advisor Brandscape 2010 to conclude that a surge in satisfaction among wirehouses brokers indicates that the heyday of the breakaway movement is over – a conclusion I have haven’t heard from any other source. [Aite Group of Boston, raised the possibility, however.] See: Study: Breakaway trend may slow as wirehouse mergers start to click

“On average, advisors’ satisfaction with their firm is up 15% over last year, with the biggest uptick noted among the national wirehouse representatives,” writes John Meunier, principal of Cogent Research at the start of Chapter One. “In fact, Merrill Lynch advisors are among the happiest within the channel, demonstrating a turnaround of almost 180 degrees. By this measure, it would appear at least that the Bank of America/Merrill Lynch merger was successful.” [Cogent lists Merrill Lynch as a client on its website.]

Beyond the advisor satisfaction number, which the study says is probably largely based on the size of retention bonuses [The study notes — as per #10 below — that retention bonuses are an unsustainable ways of levitating advisor morale.], the study does not give many reasons for its conclusion. It doesn’t, for instance, take into account the potential effect of new regulation on financial services.

And it seems to ignore what executives at RIA custodians are saying about their success in attracting breakaways in recent weeks and months.

Bigger, more interesting teams

“The volume of individuals may be slowing but we’re seeing bigger, more interesting teams and that suits us just fine,” says Mike Durbin, president of Boston-based Fidelity Institutional Wealth Services.

See: Both Schwab and TD Ameritrade smash breakaway recruiting marks from last year and Fidelity weighs in with breakaway results reinforcing the big-advisor trend

“Sure [wirehouses] have stabilized the environment but this [breakaway trend] began way before the market turmoil,” says Bernie Clark, executive vice president at Schwab Advisor Services, who heads RIA custody. “I don’t see it at all as a trend that’s going to slow. It’s a career [move]. It’s a behavioral trend.”

The study does hint at the revolution under way in the financial services world with interesting data on the percent of revenue derived from fees, which is shooting higher, versus transactions in the various channels.

The survey was taken of 1,560 registered reps and advisors at RIA firms between April 29 and May 24. The study uses RIA Database and Discovery Database. The SEC data utilized by these firms allowed the to nail down the size and composition of the advisory industry. The study polls advisors evenly from different regions of the United States.

Fee revolution

Here are some of the study findings that seemed to say most about how the advisory industry is evolving:

1.) The majority of revenues earned by financial advisors are derived from fees, 54%, for the first time in the history of the industry, up from 49% in 2009 and 45% in 2007. Wirehouse advisors saw a modest increase in the share of revenues derived from fees, to 59% this year from 56% in 2009. The reps of independent broker-dealers saw a pronounced jump in fee-based revenue, to 52% this year from 45% revenue in 2009. RIA advisors had a modest increase to 82% this year from 79% in 2009.

Banks and regional brokers lag in moving their advisors from transaction-based revenue to fees. Bank advisors have only 34% of their revenues derived from fees.

But Cogent is predicting a great awakening to fees in these two advisory channels over the next couple of years. Bank advisors’ revenues are expected to vault from 34% fees today to 50% fees by 2012; regional brokers’ revenues are expected to jump from 35% today to 49% in 2012. IBD reps are expected to continue their rapid adoption of fee-based revenue processes and will leap to 61% fee-based compensation by 2012, from today’s 52%. The share of wirehouses advisors’ revenues that are fee-based is expected to rise to 67% by 2012, up from 59% today.

Cogent Researchers [Meunier and Meredith Lloyd Rice] speculate that there are two reasons for this dramatic increase. “The migration in these two channels [regional and bank] might be a reflection of advisor concern for losing clients to fee-based advisors or potentially as a result of the advisors in these channels adopting their firms fee-based or wrap programs.”

More advisors

2.) The sheer number of advisors at RIAs and registered reps in 2010 is 351,845, up 27,345 advisors from 324,500 advisors in 2009. There were 326,500 advisors in 2007. Virtually all of the growth occurred in the IBD channel, up 21,000, and bank channel, up 11,568, according to Discovery Database and RIA Database information culled from SEC ADVs. Wirehouse, regional and RIA channels combined to record a net loss of 7,252. There are about 28,476 RIA firms, up slightly from 28,000 in 2009 and down slightly from 30,000 in 2007. Going forward, these numbers are expected to stay stable, according to the Cogent study. “The overall volatility in these advisor population numbers, exacerbated by channel reclassification due to mergers or acquisitions and channel migration by disaffected advisors, appears to be waning significantly,” it says.

3.) The average tenure of advisors at their firms continues to rise and currently stands at 16 years, a jump of about 25% from the 12.8 years of experience advisors reported in 2007. “The biggest increases are now evident in the National and Regional channels, where the average tenure of advisors is now 15.6 and 16.4 years respectively … at 15.5 years, there has been little change this year among RIAs, following a dramatic increase of almost 50% noted in 2009 compared to 2007, a period in which many national brokerage firms lost some of their biggest producers to the RIA channel.”

4.) Because the advisory market is now more dominated by seasoned advisors, and because sidelined assets are getting managed again and equity markets have improved, average advisor AUM has improved to $87.9 million in 2010 from $80 million in 2009. The increases happened in all channels, except among RIA firms, where the average AUM stayed relatively flat at $212.4 million, according to Cogent’s study.

5.) There is a leveling off in the number of financial advisors that are forming teams at about 22% of advisors being part of a group. This trend has been driven by a teaming trend at wirehouses that pushed the number in groups from 18% in 2007 to 31% in 2009. It held steady at 31% in 2010. 37% of advisors at RIA firms are part of teams, the same as 2009 and up fractionally from 345 in 2007.

Apex predator

6.) Different advisor channels tend to serve clients of varying wealth levels. The apex predator is the RIA firm, reporting that at least 9% of clients have more than $2 million in investable assets and 46% of clients have $500,000 to $2 million with a mean of $1 million. This compares to wirehouse brokers with clients with average investable assets of $874,000 and IBD reps with an average of $547,000. The average advisory client is 57.7 years old and has $691,000 in investable assets.

7.) Advisors in different channels also indicate differing roles. Nine in 10 see it as their responsibility to “build strong relationships with clients and 49% say this is their first-ranked priority. Somewhat surprising and potentially an effect of the new team-based business models is that fewer set as a priority “selecting the optimal mix of assets, 49% or “constructing investment models”, 18%. RIAs set themselves apart by saying that model constructing was a priority for 28% of them. In this regard, wirehouse brokers are at 21% and regional brokers are at the bottom at 12%.

8.) Advisors’ satisfaction skyrocketed in 2010 from the levels of a year before. “In what must only come as good news to distributor firms that have struggled for years with unhappy advisors, satisfaction among advisors with their current firm increased a whopping 15% among advisors in the last year and now stands at 63% who are satisfied. The biggest improvements occurred among National and Regional advisors where the uptick in satisfaction has been 29% and 31% respectively. Today 81% of Regional advisors and 49% of national wirehouse advisors report that they are very satisfied with their current employer, says the study.

Morgan Stanley Smith Barney is the exception

UBS jumped from 36% satisfaction to 46%. Wells Fargo Advisors/Wachovia jumped from 30% to 54%. The report adds, however, that Morgan Stanley Smith Barney [which Cogent lists as a client on it website] is the exception to that rule with its satisfaction dipping from 45% to 44% satisfied. This finding aligns with an RIABiz look at this subject. See: Why Smith Barney is now the most target-rich environment for recruiters of breakaways.

There are good reasons for this meteoric mood surge among stockbrokers.

“The strong wirehouse scores, particularly for Merrill Lynch, can be chalked up to strong retention programs, including what some might call above-average bonuses, particularly for top-producing advisors,” says the study. It may also be that they’re making more money because of their orientation toward banking products at a time when investment product sales are in a lull, according to a new Bloomberg article. See: Merrill Lynch mauls Morgan Stanley in clash of U.S. brokerage titans

9.) And the Cogent researchers suggest that the recruiting landscape now sports a very changed look. Some 79% of advisors now are content to stay in place, up from 74% last year. And the proportion of advisors itching too make a move fell 25% with only 6% of advisors saying they are very likely to break away.

Advisors finally happier

“Advisors are settling in to their new firms, happier than they’ve been in quite some time and busy with the task of rebuilding their practices and rebuilding relationships with providers,” the report reads.

Still, last year, wirehouse brokers were rated most likely to break away. This year brokers in the bank channel have gate fever with a doubling from 5% in 2009 to 10% today who are rated likely to leave. Only 2% of RIA advisors say they are likely to leave their firm and 81% of people pondering a switch from their RIA firm would stay in the RIA channel.

10.) The study concludes with one downote for wirehouses – that large signing bonuses are a key driver of wirehouse broker satisfaction. “Lavish financial incentives are unlikely to be a sustainable trend,” it says.