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Why The Transactional Brokerage Model Might be Dead

July 21, 2017

The traditional brokerage model is on the way out because of reputational damage large firms suffered as a result of the 2008 financial crisis and the shift toward the fiduciary standard, Barry Ritholtz writes in Bloomberg. But the biggest driver of the concurrent growing popularity of RIAs is technology that lets advisors go independent, according to the founder of Ritholtz Wealth Management.

The back-office investment necessary to set up an advice practice once prevented all but the biggest startups from going independent, he writes. Handling accounting, recordkeeping, portfolio management, payroll and other aspects of running a practice was more than most independent advisors could handle on their own, according to Ritholtz. And outsourcing was simply too expensive without scale, he writes.

That’s all changed with the advent of fintech firms whose tools now let RIAs handle back-office tasks cheaply and more efficiently, according to Ritholtz. And as the advantage offered by larger brokerages in terms of marketing and costs dwindle, more advisors will break away or set up independent practices, he writes.

But the “broker exodus” is speeding up, the Wall Street Journal writes. While in 2010 traditional brokerages controlled 63% of assets invested with financial advisors, that dropped to 59% by 2015, according to Cerulli Associates data cited by the paper.

At the same time, indie advisors grew their share of the market from 37% to 41% and are expected to control more than the large brokerages by 2020, according to Cerulli. And since the financial crisis, new firms such as Dynasty Financial Partners and Focus Financial Partners have stepped in to help advisors go independent, the paper writes.

In fact, many banks are increasingly relying on wealth management revenue to keep themselves profitable, according to CNBC. Morgan Stanley’s wealth management revenues in the last quarter made up close to 43% of its total, while trading and investment banking accounted for 49% and investment management just 8%, the news website writes. Wealth management made up 21% of the revenue at Bank of America, 12% at JPMorgan Chase, 11% at Regions Financial and 9% at Fifth Third, according to CNBC.

But the wirehouses have noticed and are fighting back, according to the Journal. Merrill Lynch and Morgan Stanley are big brands familiar to investors and have been able to attract billions in fee-based assets, the paper writes. UBS, meanwhile, decided to pay its brokers more to convince them to stay on, according to the Journal. And many major brokerages are entering the robo-advice arena to go after less-affluent investors in the hope of selling them traditional wealth management services down the line, the paper writes.

Yet another big threat to the traditional wealth management approach is demographics, as reported earlier. Baby boomers are expected to transfer $10 trillion in wealth over the next decade. And the heirs to that wealth aren’t fans of the old model: they expect technology to be a big part of financial advice and are skeptical of the industry overall following the 2008 crisis.

By Alex Padalka
  • To read the CNBC article cited in this story, click here.
  • To read the Bloomberg article cited in this story, click here.
  • To read the Wall Street Journal article cited in this story, click here.