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Four Wirehouse Problems RIAs Have Already Solved

April 25, 2013

Now that the markets have recovered to 2007 levels, some advisors at the four "wirehouses" -- Merrill Lynch, Morgan Stanley Wealth Management, Wells Fargo Advisors and UBS Wealth Management --may be lulled into believing that the worst is over for their business model. These advisors may feel that they dodged a bullet. After all, during the worst of the crisis, their phones were ringing off the hook with calls from clients who feared for their firms’ solvency.

Now the phone calls have stopped. Business is good, with brokerages like Merrill Lynch and Morgan Stanley Wealth Management reporting increases in assets under management and in profitability.

Unfortunately, things probably won’t stay so positive for long. Four big changes are coming to the industry that will breed tension between wirehouse advisors and their clients and probably cause more advisor defections to the RIA channel.

Chief among these changes is the potential requirement for a fiduciary standard of care. While Wall Street lobbying groups have done a marvelous job so far of postponing the requirement, mandated in Dodd-Frank, the Department of Labor is moving ahead. Phyllis Borzi, newly confirmed head of the DOL, has a mandate to make this requirement a priority.

That means non-fiduciary brokers may eventually be prohibited from managing retirement assets. And among these retirement assets are IRA accounts, something just about every investor owns. No advisor wants to have to tell clients that he or she isn’t objective enough to oversee an IRA.

The second trend is also regulator-related, and that is the potential requirement for brokers switching firms or signing a retention deal to disclose to their clients any payments they receive. One can only imagine the difficult discussions that can arise when investors learn their advisor is getting a million-dollar payday, while all they get is a load of fresh paperwork or, at best, the status quo.

The third trend is technology-related. The RIA and independent broker-dealer channels are enjoying a technology renaissance. They can work with clients in a financial planning relationship empowered by mobile apps, iPads and real-time performance-reporting systems. And these advisors can increasingly integrate their account data into flexible, cloud-based programs that can be accessed on the road during in-person client meetings, as well as at the home and the office. By contrast, wirehouse brokers typically are still chained to their desks when it comes to technology. The debacle caused by Morgan Stanley’s faulty 3D platform is probably the clearest example of how wirehouse advisors are on the wrong side of the table in terms of technology issues.

The wirehouses’ technology challenges stem primarily from the slew of mergers that occurred following the financial crisis, as these big firms have spent the last four years integrating systems rather than innovating and upgrading. On the golf course and at cocktail parties, wealthy investors often compare notes on the kind of service they’re getting from their financial advisors. It’s easy to see how negative client experiences can get amplified during these conversations, with the wirehouses ending up on the losing side of the conversation.

The fourth trend is all about transparency. With transaction costs and fees rapidly dropping toward zero, marketing by the non-advisor commissioned industry is becoming more and more visible. The current war over “no cost” ETFs is a great example of this, and there’s more to come. Add in the overwhelming success of independent RIAs who get paid by the client and not the product, it is clear that investors will increasingly question exactly what they are paying for and what they are getting in return.

When wirehouse advisors consider these four potential landmines, they have reason to worry. But they also have options. A variety of alternative business models will let them turn these concerns into opportunities for themselves and their clients.