(The following opinion piece written by me appeared last week in Financial Advisor IQ (A Financial Times Service):
One of the most discussed issues in the financial-services industry over the past few years has been the competition for advisors between traditional broker-dealers (wirehouses and regionals) and independents or RIAs. Everyone is speculating over which type of sponsor firm will be the ultimate winner.
Last year reaffirmed the position I have held for a long time — namely, that it’s a false rivalry. Each group is now well positioned to succeed. Sure, the market share of each type will fluctuate, and some observers will see any gains as one business model’s victory over another. But we have come a long way since the midst of the financial crisis, when many traditional B/Ds changed ownership and the very existence of some was in question.
Over the past few years, traditional B/Ds have made a pretty miraculous comeback, while independents and RIAs have simultaneously seen impressive growth. The bad press aimed at the wirehouses has largely dissipated, as has a lot of the investor anger targeted at them. According to InvestmentNews’s 2013 year-end ranking of firms that were the biggest beneficiaries of advisor moves during the year (as measured by net new AUM), the top five firms were Wells Fargo Advisors (adding $7.6 billion in assets) , UBS ($5 billion) Raymond James ($3.1 billion), Baird ($2.3 billion) and LPL Financial ($2.3 billion). Quite a diverse group, don’t you think?
So rather than ask whether one business model will dominate, I think the more important question is: How does each firm position itself to be as successful as possible? The real winners will be those that make their advisors the most productive, not necessarily those that become biggest.
Let’s first talk about the traditional B/Ds. Advisors in these organizations typically rely 100% on their firms to provide office essentials, investment products, training, due diligence, reporting, etc. In general, these firms are also very restrictive in what advisors can do that might be considered “outside the box.” Individual websites and marketing materials are discouraged, for example, with guidelines so limiting that many advisors decide not to bother.
While some advisors find that atmosphere too restrictive, others like the comfort of showing up at an office where all the infrastructure is in place. It’s a good environment for those who want to serve clients more than they want to run a business.
As to the difference between the wirehouses and the regionals, I think it’s fair to say that advisors at the regional firms often have a greater ability to influence strategy — for example, via product offerings. Upper management and product heads tend to be closer to advisors at the regionals, especially the larger producers. Compared with a wirehouse FA, an advisor at a regional can be a bigger fish in a smaller pond.
Advisors who want to participate actively in running and building a business are generally more likely to join an independent B/D or an RIA. They certainly have more freedom, but they have to worry about things like office space and health insurance. Most advisors in this world tend to be a little more entrepreneurial.
Within these broad generalizations, the firms that will be successful are those that offer the services their advisors need to grow AUM. For independents, that means providing the best support team to help advisors organize their businesses when they first join. For traditional B/Ds, it means offering new and innovative product choices and trying to keep compliance as business-friendly as possible. These are the firms that will wind up with the most satisfied and productive teams, regardless of their business model.
