A Surge Ahead

Retail wealth management, particularly in the fee-based arena, could come out of the financial crisis much stronger, according to a recent TowerGroup report.

The report says that the current credit crisis might re-energize recruitment efforts at registered independent adviser (RIA) firms. The firm expects significant short-term growth, as the industry responds to both regulation and restructuring. Advisers who can catch younger clients will be able to make the most of future business opportunities.

TowerGroup notes that the repercussions of September 2008 market events are “reshaping the playing field.” As advisers from one firm are absorbed into another firm, many will be left as free agents, and where will they go? TowerGroup predicts they will go to the independent channel.

The firm says banks and their affiliated bank broker/dealers are well-positioned to capitalize on the shift to fee-based advisory as well as the demand for more holistic advisory services—a migration the firm has long anticipated. At first, leading registered independent advisory platform providers were bringing on many new advisers every month, but that pace slowed. According to TowerGroup, at the height of the RIA conversion in 2003, leading independent RIA platform providers brought on more than 40 RIAs per month, many of whom came from “established regional and bulge-bracket firms.”

In the first half of 2008, TowerGroup says some of the same providers brought on less than a third of those 2003 numbers. TowerGroup also suggests that many of the assets entering the fee-based model were already captive assets and, therefore, do not represent true organic growth for the industry. The firm sees a trend of advisers with 10 or more years of experience and mature books of business converting to the RIA model—a sign of a more stable business. “A large portion of these assets were already at the firm in non-fee-based accounts, so some of this growth amounts to little more than a journal entry,” the report says.

However, as noted above, the firm predicts that the future will see a new growth out of all of this destruction, similar to the growth at the beginning of the decade. “Breakaway” brokers will look to the RIA model and broker/dealers will look to move to fee- based models. Today’s environment might accelerate the conversion to a fee-based advisory model for many advisers who might otherwise have been undecided, the firm says.

Windows of Opportunity

Currently, TowerGroup data show that the five leading financial firms (Merrill Lynch, UBS Wealth Management US, Smith Barney, Morgan Stanley, and Wachovia) have 20% to 40% of assets under revenue in fee-based accounts. Merrill Lynch has the highest percent in fee-based (39%), and Wachovia has the lowest (20%). Several of them receive more than half of the percentage of their total revenue from fee-based accounts (UBS, Smith Barney, and Wachovia). Merrill receives almost half of its total revenue from fee-based accounts (49%), and Morgan Stanley receives the lowest, at 27%.

TowerGroup sees banks and affiliated broker/dealers as well-positioned to capitalize on the fee-based advisory shift and capture future clients. Among the many reasons why, TowerGroup says they are able to provide consumers with complex financial needs, centered on retirement, health care, legacy planning, philanthropy, and wealth transfer.

There is no doubt that all types of advisers and firms will benefit from what TowerGroup calls a “renaissance in wealth management.” TowerGroup emphasizes that, to capture the clients of the future, advisers should look to young clients. The window of opportunity is when there is little competition and low cost of acquisition of the clients, around the ages of 25 to 40. After 40, there is increased competition and increasing cost of acquiring clients.