The financial meltdown of the last 18 months may be waning, but the crisis continues to impact the wealth industry.
According to a report by Aite Group, though financial advisors expect 2010 to be a great year, wirehouses are still feeling the turbulence, and concerns about breakaway brokers, although waning, remain.
Alois Pirker, the research director with Aite who co-authored the report, said in a phone interview last week that it is common for there to be growing confidence following a recession and it is those who gain that confidence first who will have accelerated and earlier growth.
Despite the fact that independent registered investment advisors are the most confident of all industry segments, according to the report, some, especially wirehouse brokers, are still very cautious.
“The market share carousel is still turning as we speak,” Pirker said. “We see firms gaining traction just by being bold in a crisis situation by onboarding clients and being confident about their business. I think 2010 will be a pivotal year where we see some gaining substantial market share and traction and some losing because they haven’t moved into growth mode early enough.”
According to the report, wirehouse brokers predict revenues growth of 13.4% from the fourth quarter of last year to the fourth quarter of this year, while other industry segments expect much stronger growth for this period. The independent RIA channel expects revenue growth of 24%.
In addition, the report indicated that 52% of RIAs expect an increase in production of over 20%, while only one-third of wirehouse brokers feel similarly confident.
If growth expectations come true, this is bad news for wirehouses. The report explains that should the stated growth predictions materialize, wirehouses are set for a third consecutive year that they will lose market share to competing segments.
Surprise? No, since wirehouse firms are continuting a restructuring that began last year, prompted for the most part by a recent increase in mergers and acquisitions. While their energies are focused on restructuring, competing segments are looking for opportunities to take market share.
So, what’s a wirehouse to do?
Hold and attract the most productive financial advisors, according to Aite.
The good news for wirehouses: the trend of breakaway brokers has slowed down from the high levels of early last year. Retention packages and lock-in contracts seem to have done their job.
Yet, Charles Schwab [SCHW] reports that it onboarded 172 breakaway broker teams to its RIA platform last year. Although the trend of breakaway brokers has slowed a bit, the appetite for breaking away hasn’t gone away, Pirker said. Eighty five percent of advisors surveyed by Aite said they give it some likelihood that they will break away, 20% said it is more likely than not that they will break away.
To be sure, there is more turbulence ahead for the wirehouses. “While the situation at wirehouses has certainly stabilized over the past year, our survey shows that only 15% of wirehouse advisors currently have no plans to break away from their employer,” said Pirker said in a press release. “While switching firms has slowed in the last couple of quarters, a large share of wirehouse brokers is prepared to jump ship should their firm take another reputational hit. Even as positive market performance restores stability, the major players in the industry continue to face serious competitive threats.”
This year will set a tone for the industry: The success of the wirehouses’ integration efforts will be telling, as well as the ability of firms to continue taking market share from wirehouses.
Pirker said during the interview that what most surprised him about the report’s findings is that although many in the wirehouse channel believed that all firms’ book of business declined, there were a substantial number of firms that gained 20% in their book of business.
What differentiated those firms which gained from those which didn’t?
“The ability to work with clients through the crisis and to be there in every stressful situation,” Pirker explained. “The ones who are top performing and confident in their ability to help clients are ultimately more convincing with the client.”
Ultimately, there are winners and losers in every channel. “The channel alone doesn’t determine your growth perspective,” he said.
But at the end of the day, the RIA channel gained substantially. From the end of 2008 to the end of last year, RIAs gained $350 billion in assets as a channel and took 1.5% of market share in 2009 alone. One reason: RIAs have the fiduciary standard on their side.
Nonetheless, the overall number of RIAs dropped last year as some have sold their practice to bigger firms and others have retired. “While there are inflows to the RIA channel, there is consolidation going on as well,” Pirker said. “Those who haven’t done as well sold in 2009.”