Forecasts of a steady deterioration in profit at Merrill Lynch, Morgan Stanley, Wells Fargo Advisors and UBS Wealth Management Americas are highly exaggerated, analysts at Sanford C. Bernstein & Co. declared in a new report on Friday.
The brokerage giants have lost market share to smaller firms and independent advisers due to reputational damage to their parent banks during the financial crisis, but they still dominate and much of the slippage may have been strategic.
The wirehouses, as they are known, have dumped brokers who generate subpar revenue and are focusing on those who serve clients with investable assets of $1 million or more. Those affluent clients and the products they buy generate much higher profit than typical brokerage clients with $100,000 or more to invest.
The Bernstein analysts also debunked studies and press reports that cite the impending retirements of older clients and wirehouse brokers — the average age of top advisers based on assets they oversee is 60, Bernstein says — as reasons for a new generation of investors to bolt to smaller competitors.
"The demographic trends that will impact the industry over the next five years are entirely manageable or positive for the wirehouses," the analysts led by Brad Hintz wrote. "We believe that the wirehouse channel remains, and will remain, the most profitable portion of the North American full-service wealth management industry over the next five years."
The report comes amid a flow of studies over the last two years that track a small but growing number of wirehouse advisers leaving for independent brokerage firms such as LPL Financial Holdings. The smaller firms give them fewer services but a higher percentage of the revenue they produce. The studies also show more clients trusting their money to registered investment advisers, individuals who are usually paid a percentage of client assets they help oversee rather than commissions for sales of stocks, bonds and financial services.
A study released on Thursday, for example, showed that mutual fund and exchange-traded fund assets at independent brokers and RIAs grew 8.5 percent during the first quarter to $3.1 trillion compared to a 6.5 percent jump to $1.4 trillion at wirehouses. The totals exclude low-yielding money-market funds.
"Five years ago everyone in the fund industry focused on selling through the wirehouses," said Frank Polefrone, a senior vice president at Access Data, which compiled the study with consulting firm Strategic Insight. "Over the past 18 months, we've seen these independent channels for advice-driven investors growing much more rapidly."
Hintz said in an email that numbers don't tell the whole story.
"I'm not certain the market share shift is unwanted," he wrote in an email. "The wirehouses have been shedding more advisers and more offices than assets overall, so they are increasing their margin and targeting a narrower client base. They remember what Willie Sutton said — 'Go where the money is.'"
According to the report, the wealth management industry is on the rebound from a long slough that began in the financial crisis, and the biggest part of the growth is occurring among the wealthiest individuals.
Profit across all wealth industry channels, including discount brokers such as Charles Schwab and TD Ameritrade, will grow at a compound annual rate of 7 percent beginning this year, according to the Bernstein analysts. The wirehouses should prosper because they are selling "complex, higher margin products like alternative investment vehicles and structured products, giving them a significant profitability advantage over firms in other channels," it said.
Brokers at wirehouses and RIAs, on average, oversee more than $100 million of client assets, compared with about $65 million per broker at regional brokerage firms and $25 million at independent firms, according to the study.
Measured by client assets under custody, wirehouses overwhlem its competitors with about 34 percent of the market, followed by 13 percent to 14 percent in the other sales channels, according to the Bernstein study.
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