Wirehouse broker-dealers controlled an estimated 38.8 per cent of total advisor-contributed assets in 2012, while registered investment advisors and dually registered channels posted the strongest asset growth.

Wirehouse broker-dealers controlled an estimated 38.8 per cent of total advisor-contributed assets in 2012, while registered investment advisors and dually registered channels posted the strongest asset growth, bolstered by advisor movement, new research shows.

Even though the dually registered channel and RIAs gained considerable momentum last year, with asset growth rates of 14.7 and 19.1 per cent respectively, the fact that wirehouse broker-dealers maintain such a hefty proportion of marketshare makes it “difficult for managers to ignore them,” said Sean Daly, analyst at Cerulli Associates.

In its report, Advisor Metrics 2012: Behaviours, Preferences, and Channel Movement, Cerulli said advisors opt for the dually registered channel to diversify their revenue source, retain access to commission-based products and maintain connection with broker-dealer support services. “Broker-dealers should consider offering advisors multiple paths within their firm to help retain advisors under one umbrella,” Daly said.

The dually registered channel also logged the biggest growth in terms of new advisors, adding 1,187 and even outpacing RIAs at 783. Cerulli said the channel is particularly popular among legacy independent broker-dealer advisors: “These advisors are used to independent operation, therefore opening their own RIA presents limited challenges.” 

Challenges and risks

Competitors within the independent broker-dealer channel “suffered significant losses” of advisors who had insufficient revenue to support ongoing operations, Cerulli noted. On the other hand, the “flush out” of advisors will ultimately be “healthy for the industry,” as assets consolidate among the remaining providers. “However, the industry must find ways to organically build assets despite market conditions in order to turn the tide of head reductions,” the firm added.

Another challenge relates to client perception of advisors, as many clients believe that their advisors operate under a fiduciary model in which they must put clients’ best interests first. “However, the reality of the situation is that a majority of client relationships are governed by the suitability standard of brokerage accounts,” Cerulli said. Despite this, both advisors and investors are gravitating towards those firms that generate the bulk of their revenue via fees directly associated with investment and financial planning advice.

Lastly, advisors and their firms should keep a close eye on their under-30 client base. While this segment isn’t the most profitable as yet, as wealth grows they can become a significant part of an advisor’s practice. “A strategy inclusive of younger clients will help replenish the declining asset base of their older clients with younger aggregators,” the report recommends.

Growth prospects

The concentration of assets and high productivity of wirehouse broker-dealers means they can still be “very profitable" for asset managers, despite high costs and competition. However, asset marketshare of this segment is projected to fall from 41.1 per cent in 2011, to 38.8 per cent in 2012, 36.5 per cent in 2013 and then to 34.2 per cent in 2014 - representing an overall loss of -6.9 percentage points. By contrast, Cerulli forecasts the marketshare of RIAs and dually registered channels to grow by 2.2 and 2.4 percentage points respectively.  

“Advisors have piled in to the RIA channel either by starting their own practice or joining an existing firm, drawn by the expectation of higher payouts, practice autonomy, and a reduction in conflicts of interest with their clients,” the firm said. “Wirehouses have stemmed their decline through the use of retention bonuses and the power of inertia, but are anticipated to cede marketshare over the coming years to the RIA channel.”

Data included in the report was compiled from three primary surveys, including a poll of some 9,500 financial advisors.