A changing industry

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Sep 27, 2008 11:13 am

The way we’re going, there soon won’t be any wirehouses or super-regionals. Looks like we’ll end up being bank, independent or Edward Jones…egads…

We're practically there.

Some interesting questions this raises....

With the increase in the number of indy advisors (many of whom are "solos"), and the consolidation in the industry, what does this mean going forward? Here are some thoughts to ponder...

- If you don't start at Jones or a super-bank (all 3 of them), how do you start? Pretty soon, there will be like 150,000 "captive" brokers spread among 5 or 6 firms. You can't start indy (unless you can get hired by a large indy - and not many exist).

- Will we start to see indy firms gobbling each other up? (which is already happening) Will this lead to the rise of "super-indies"? How long will it be before many of the independant firms have thousands, if not tens of thousands of FA's, and look like the wires of "yesteryear" (errrr, yesterday). Is that self-defeating?

- It will be a strange dynamic when there are only a few super-bank-B/D's left (Citi, JPM, BAC, and whatever happens to Morgan). If you decide to jump-ship, will there be much incentive for a firm to give you a big check? After all, if you have 25,000 advisors and well over a $trillion in AUM, how much impact does a $200mm team have, really? Especially when the same number of people are leaving your firm as coming. This is not a knock against any firm or channel...it's really just something to think about. Maybe it just won't change anything - BOM's still have to keep growing and recruiting.

- Will we have COMPLETELY commoditized an already-commoditized industry?

- How will this change the landscape of our industry?

- I think we are seeing a seismic shift in our industry unfold before us. I'm not sure what will happen, who will benefit, and if it will be all positive. But in 5 years time, I believe the industry will look very different.

- From a product standpoint, will it be back-to-basics for a while (stocks, bonds, funds, etc.)? Will there be newer, "better" hedging products out there, after considering how this market decline unfolded? Is conventional asset-allocation wisdom going to be turned on it's side? I've been reading a lot lately about this. Not sure what's going to catch on, but the theorists and economists will be out there in droves.

Lot to think about....
Sep 27, 2008 12:27 pm

I had this exact conversation with several peers just yesterday and here are my thoughts:

  First and foremost, I think the growth will be more towards independence and that growth will be supported by small to mid sized "boutique" firms or OSJs working under various independent b/ds. Many of these OSJs will provide a second layer of service and support for advisors because it will become virtually impossible (and less profitable) for independent b/ds to provide OUTSTANDING service and support to a massive, diverse advisor field so I think most b/ds will start specializing (much like ML established minimums and culled the smaller clients). Some of the indy b/ds have already started carving niches instead of becoming jack of all trades. Most of the products that used to be "exclusive" to the wires and banks are now increasingly available through the independent platform. The flexibility in how an advisor markets their practice is now a top priority and indy b/ds that recognize this have a distinct competitive advantage. Of course, not all advisors want to grow exponentially, some just want to keep what they have and take the top payout. I also think that the biggest eventual trend to emerge in this channel will be the buying, selling, and merging of practices. FP Transitions has the right idea because succession planning will absolutely explode. I am not saying they are the best, just the right idea. Don't flame me.    I have posted before that I think Wachovia has the best business model for the big name b/ds... again, I am not saying they are the best at it but I think the model compliments their bank offerings well. I think the growth will slow in this arena (as do recruiting packages).     You will still always have regionals in the mix and I think that they will steadily continue to grow in rep size. Certain benefits (read: health insurance) in place of a higher payout are growing in importance to many advisors and a lot of regionals offer a great balance of the two. Certain insurance b/ds (Lincoln, ING, AXA) will be competitive in this space as well unless something changes in health care.   The winners in this race are going to be the advisors who can distinguish themselves from their competitors through marketing. The days of just offering stocks, bonds, and cash are over. Alternative, non correlated investments (life settlements, structured and guaranteed products, commodities/managed futures, etc.) that allow an advisor to "diversify to death" a portfolio will provide a big boost to the indy channel because many of the larger firms don't or won't offer them.       It will be up to the advisor to properly perform their due diligence in looking for the right match of b/d culture and value proposition that meets the advisor's needs and fits their business model. Truly, this is an opportunity of a lifetime for many if you can identify the newly emerging trends in the industry.   
Sep 27, 2008 2:49 pm

Great post. Newbie thoughts here:
1. I’ve been amazed that so many big-name, reputable firms have allowed their most valuable asset – their brand names — to be tarnished. AGE had a wonderful reputation; now it’s in never, never land. Merrill was gold; it doesn’t have the same cache, imo, after the mistakes by the investment bankers.
2. Wall Street is mud right now to the general public. If I was a client, I sure wouldn’t be trusting any advice coming from Wall Street.
3. This should be good for independants and maybe for a company like Fidelity, which has a good reputation and has its hooks in people because of their 401ks. If I was running Fidelity I would be trying to hire or bring advisors aboard to focus on everyday investors. Maybe Bank of America can do that, now that they’ll  have a branch on every corner, but the marriage with ML seems like a uptown girl, downtown man relationship.
4. We have to strengthen and keep Social Security. Most of the everyday people I run across do not have the temperament or the smarts to be in the stock market. If they get with a good advisor, they would be fine, but I run into so many hard-working people in their 50s and 60s who just are not ready for retirement and probably never will be. We need to strengthen the safety net for them. I used to be for privatizing SS. But now I don’t think people can handle that. In other words, we have to give them a little socialism so we can maintain the free market system.
5. Every firm wants the HNW investor, but I think there is an opening for somebody to ‘commoditize’ the business, to put a brokerage firm on every corner, advertise like hell, market like hell, sell simple, understandable products and corner the market on Main Street. Could be a Fidelity or a Bank of America. … (I think EJ has the office model to do that but they’d have to put multiple brokers in office, pay salaries and market. Er, I guess that would be a different type of company. But I could see a Starbucks approach to investment advice working, at least for the stockholders.

Groupies’ bold post really has gotten me fired up about thinking what I want to be and where can I best do it.

Sep 27, 2008 3:31 pm
buyandhold, Good points. I think the most recent turmoil will bolster the demand for expanded comprehensive financial planning. I did not address the RIA model in my previous post but I should have as many of the indy b/ds are building hybrid models to accomodate this alternative. I think as investors take a closer look at what and how they are investing, fee sensitivity will become more of an issue. Part of the changing landscape in the business will include a huge examination, and elimination of, conflicts of interest at all levels.   
Sep 27, 2008 4:46 pm

Muchos -
You are absolutely right in you comment about this b olstering the demand for expanded financial planning. I dont want to make any sweeping statements about the stockbroker being dead, (i think i might have made those statements in the past, probably true, but i;d rather not get into it) but people are going to wake up and realize that this aint about stockpicking, and it aint even about returns, because there is just too much you cant control. Its about having a plan, one that addresses everything INCLUDING BUT NOT LIMITED TO investing. And the investing part of the plan is about strategy.

As far as the industry structure, B24 hit it on the head, we are going thru a siesmic shift and the industy is literally changing before our eyes. I wonder (and fear) the possibility that the wirehouse brokers (now known as the bank brokers) will be working for a salary plus performance based bonus, like they do in Europe, or here in the private banks.
Recruiting deals, in my opinion are all but done. There is no doubt that the big deals that have been offered the last few years and are being offered now, are going down by year end. Down considerably. And eventually they may go away completely. They never made sense as a model, and now there is no reason for them (from the wirehouse point of view), with only a few large firms to be left standing.
Here’s another thought - lets say Citi for example, does end up buying Wachovia. Now Wachovia is SB. The current SB has quite a few empty desks. Do they cut the fourth and fifth quintile at both firms and fill the empty desks at SB with the first and second quintile guys at Wach? And what does Citi do with the Finet guys (i think thats the WB Indie channel, right?) Do the SB guys get the opportunity to go that way? That would make a lot of sense to me because it would help SB stem the flow of wirehouse guys to the Indie B/D’s
This is going to be very very interesting. The next few months,or the next year,  will bring so many surprises and changes that our heads will spin
The one thing we all know, is there will be an awful lot of money in motion over the next 6 months.

Sep 27, 2008 6:54 pm

Take a look at my signature. I just realized, its too late, it happened!!!

Sep 28, 2008 8:06 pm

Ok, so I think we all probably agree that the landscape will drastically change.  The amount of change we see will be much more significant than what our clients and the general public sees.

  How do you think the public will see the change?  Do you think they will care whether the wirehouse is now the bank?  Do you think they will seek out independent advisors or RIA's?   For the most part, many clients view us all the same.  Does this continue to happen or not?
Sep 28, 2008 8:20 pm

That might PARTLY depend on how the banks position us (those who are at wires).
Will we be positioned as just another service offered by the banks?> if so, the public will definitely see us differently.
I only have a vague idea of what i am talking about, i am not sure (i dont think anyone is) exactly what it will look like.