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Full-Service Brokers Win Back the Wealthy

More wealthy investors are seeking financial advice from full-service brokers, who, after losing half their market share in recent years, are now staging a spirited comeback.

More wealthy investors are seeking financial advice from full-service brokers, who, after losing half their market share in recent years, are now staging a spirited comeback.

Nearly one-third of affluent investors—those with $500,000 or more in investable assets—were using full-service brokers as their primary advisors in 2005, a significant jump from 24 percent in 2004, according to recently released research from Spectrem Group, a Chicago-based strategic consulting firm specializing in wealth management and retirement. In 2002, full-service brokerage represented a robust 45 percent of the affluent marketplace, which steadily declined to 36 percent in 2003 and 24 percent in 2004.

In the wake of a prolonged bear market and pervasive scandal on Wall Street, many wealthy investors were reluctant to entrust their money to wirehouse and regional brokers. But the Spectrem data reveals that these skittish investors have had a change of heart. “Full-service brokers can breathe a little easier now,” says Catherine McBreen, managing director of Spectrem. “This segment had a tough couple of years through 2004, as affluent investors moved toward specialists like investment advisors, investment managers, accountants and bankers.”

Investment advisors ranked second behind full-service brokers with 17 percent of affluent clients, a modest decline from 18 percent a year earlier. Financial planners garnered 14 percent of affluent clients, down from 17 percent in 2004. The data is based on a poll of 1,014 affluent investors who completed a 12-page questionnaire mailed to their homes.

A key driver of this trend is that full-service brokers are doing more for their clients and moving more toward open architecture and away from proprietary products. Advisors are adopting a more “collaborative approach” with clients and their other advisors for things like tax and estate planning or succession planning, according to Spectrem director Tom Wynn. “Full-service brokers have responded,” Wynn says. “They’re getting better and they’re working harder.” Wynn also believes that the favorable market conditions this past year have brought people back to the major wirehouses and regionals. “A modest upswing in the market tends to send people back to territory they’re familiar with,” he says.

Another major catalyst behind their resurgence among the affluent has been that the fee-based business model is really starting to gel at the major brokerage houses. “They’re getting better at fee-based financial planning,” says Dennis Gallant, director of Cerulli Associates, a research firm headquartered in Boston. Indeed, the major wirehouse reps have been morphing their books of business to the fee-based model and offering a broader range of products, and with great success. “Fee-based business is taking hold,” agrees Matt Bienfang, senior analyst at TowerGroup, a research firm in Needham, Mass.

Smith Barney, for example, saw its fee-based revenue soar 19 percent in 2005, according to its year-end earnings report. The wirehouses are also purging their low-end producers and replacing advisor support for smaller clients with call centers, perhaps most notably Morgan Stanley. These firms have also beefed up their recruiting efforts in an effort to attract the industry’s top producers. Merrill and Wachovia have been very successful in this area.

This has had an adverse effect on the independent broker/dealers. “The independents are not able to recruit anymore,” Bienfang says. “Firms like LPL Financial Services and Jefferson Pilot Securities are suffering because they don’t have the infrastructure or the scale.” Prior to the widespread acceptance of the fee-based model, “the independents benefited from the culling of transaction-based brokers,” Bienfang says. Now, the well has dried up, he says. “Full-service brokers are pulling back market share from the independents.”

Still, firms like Charles Schwab and Fidelity are seeing plenty of traction in the registered investment advisor space. Schwab Institutional, which provides custody and trading for independent fee-based advisors, saw its client assets increase 17 percent to $406 billion and the number of accounts rise 7 percent to 1.4 million. Counter to what the Spectrem data says, Schwab believes the independent investment advisor channel is the fastest growing segment for the nation’s burgeoning wealthy population. “Affluent investors are clearly voting in favor of independent advisors,” said Deborah Doyle McWhinney, president of Schwab Institutional, in a prepared statement.

There’s no question that Schwab has enjoyed success in the independent channel but clearly the convergence of practice types has made it a more competitive environment. “Every channel out there is moving upmarket,” Cerulli’s Gallant says. “But no one really has solid data on how many affluent clients are out there.”

Today’s full-service brokers more closely resemble financial planners because clients are demanding more choices and better products and services. “Consumers are looking for predictable, stable returns with more transparency in pricing,” Bienfang says. “It’s getting very unwieldy for the consumer to manage all their different accounts.” Alas, full-service brokers have reinvented themselves to provide an attractive offering for the high-net-worth investor.

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