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October 27, 2021 at 10:20 AM
What You Need to Know
- Wirehouse advisors were predicted to become extinct, with the flight to independence driven not only by advisors but also by clients who have wanted a conflict-free experience.
- These firms created products and services, and relied on the latest marketing messages to remain relevant.
- While many advisors have left the wirehouses, the majority of top-producing reps chose to stay. Here's why.
If you have been an observer of the wealth management space this past decade, then you likely have seen the long list of news articles, academic studies and opinion pieces forecasting the imminent death of wirehouse advisors.
You know, the 50,000-plus strong advisor force that still resides at UBS, Merrill Lynch, Morgan Stanley and Wells Fargo?
Particularly as the markets have ebbed and flowed over the years, employee-based advisors and their motherships have been under tremendous pressure to keep up with the times and survive the many scandals and crises that have come at them — most of which, by the way, were caused by their own greedy devices.
The prime example being the great financial crisis of 2007-2009 that saw many of these firms go bankrupt or forced into acquisitions by large banks to remain solvent due to their massive mortgage-backed securities failings.
When you combine their many missteps with an archaic, conflict-rich, product-sales culture and an industry that is rapidly changing, it’s no wonder that the term “breakaway broker” has become part of the lexicon.
So much so that for many analysts and observers, wirehouse advisors were predicted to become extinct in the coming years, with a massive flight to independence driven not only by advisors leaving these firms but also from their clients who are seeking a better, more objective and conflict-free experience.
Ultimately, you would think that a once-in-a-generation financial crisis would seal their fate; however, you would be wrong.
Not even the mind-boggling fake-accounts scandal at Wells Fargo has seriously dented the momentum of the wirehouses as they are emerging from their new bank-owned status and are now thriving in today’s bull markets. In fact, according to Cerulli, the wirehouse advisor channel actually has been growing — from $8 trillion in 2018 to over $12 trillion in 2020.
How can this possibly be?
A History Lesson
Before we get into those sordid details, let’s take a step back and look into the origins of the wirehouses and where these institutions came from to gain perspective. The term wirehouse owes its ancestry to back in the day, before the Internet and modern communication methods, Wall Street brokerage firms were connected to their branches primarily through telephone and telegraph wires.
This enabled branches to have access to the same market information as the home office to enable their brokers (they were called brokers back then) with the ability to provide quotes and the latest market developments to execute high-commission transactions on behalf of their clients.
Believe it or not, this wire-connected experience was a competitive advantage for decades, providing a select group of wirehouse franchises to emerge with access to tens of millions of investors across the country, all of which ultimately created their historic growth and brand recognition.
But as we know, technology evolution and the rise of the discount brokerage industry dramatically leveled that playing field and now anyone with a smartphone can get quotes, market information and execute trades “commission-free” with the swipe of a finger from literally dozens of providers.
At the same time, new technology platforms emerged along with no-load mutual fund marketplaces creating an emerging business model for becoming an independent advisor.
These new custodial and clearing platforms enabled independent advisors to “unbundle” their advice from the product transaction, creating a clear, objective, fee-based differentiation for independent advisors so that they could easily charge for their advice directly in a fiduciary, conflict-free model.
It’s a Wrap
Once again, this should have been the end of the wirehouses, however, what we have seen time and time again is their ability to create new products and services and wrap themselves in the latest marketing messages to remain relevant.
Key to this ability is their product geniuses who went back to their bundling-play book and developed the separately managed “wrap account” at upwards of 300 basis points, all-in.
These wrap accounts re-bundle the cost of investment advice and management with transactions via an opaque product structure that includes money manager fees, underlying product fees, platform fees, trading costs and of course the obligatory advisor commission, all for one convenient and non-transparent bundled fee.
