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Industry course adjustment: How wealth management is powering ahead

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Just as advisers urge their clients to focus on their long-term plans, when the going gets tough, brokerage executives are doing the same.

In interviews with more than a dozen leaders of wealth management firms, executives say they are adjusting course where necessary but otherwise plowing ahead with planned technology upgrades and doubling down on serving clients. By doing so, they say their firms will be able to weather current storms and be well-positioned to take advantage of the next upswing.


Asset growth for many firms was weak at the end of 2015, and 2016 isn’t proving to be any kinder. All four wirehouses reported declining AUM for the first quarter. Executives say market volatility in previous months and general economic uncertainty have hit clients hard and left them unwilling to invest more in the markets.

“What we basically see is that it takes some sustained period without volatility for clients to feel like you would expect them to feel,” says Mary Mack, president of Wells Fargo Advisers.

She adds that Wells Fargo, which reported a 2% year-over-year decline in assets for the first quarter, expects additional volatility this year, due in part to the presidential election.

Michael Purpura, president of the Individual Investor Group at D.A. Davidson, says investors are partially reacting to past scars.

“If you think about investor psychology, they’ve been through some pretty serious corrections,” Purpura says, pointing to the financial crisis.

When investors see a major market retreat, Purpura says, “especially investors who don’t have a good adviser who’s developed a good plan for them, they’re thinking, ‘Is this happening again?’”

In the meantime, however, some executives have expressed disappointment with recent firm performance.

“We’d like to see it a little bit higher,” says Jim Weddle, head of Edward Jones. “But the market, the volatility, the news — it’s not real positive. I think people are taking more of a wait-and-see approach.”

And while the industry has been migrating to a predominantly fee-based business, transaction-based income remains a key part of the mix at many firms, such as Wunderlich Securities, a brokerage based in Memphis, Tenn.

“We have a lot of transactional advisers here, and love every one of them, but their business has been hurt,” says Jim Parrish, president of the wealth management division, which counts nearly 200 employees and independent advisers.


To weather this storm, some executives have looked to greater expense discipline. Parrish says Wunderlich slashed costs across the company last year, improving their performance through this rough patch.

“It’s surprising what you don’t need when you start asking hard questions.” Parrish says. “During bull markets, you look beyond that stuff sometimes.”

Headwinds have also led some firms to adjust their plans. For example, Edward Jones was aiming to grow its business to $1 trillion in AUM and 20,000 advisers by 2020. After a recent review of its growth goals, the firm has pushed back its deadline to 2022. (The St. Louis-based brokerage recorded $876 billion in assets for 2015, up from $866 billion for 2014.)

Weddle says he’s still keeping the future in mind while adjusting to present conditions in order to ensure the firm’s long-term health.

“When the markets start performing better, when the economy starts growing in a more robust way, we will be positioned in a way to take advantage of that,” says Weddle, who points to the strength of the firm’s training efforts, which have boosted headcount to about 14,500 advisers from 200 when he joined Edward Jones in 1977.

“You don’t start and stop your recruitment and training. At Edward Jones, the investment we make in training our folks is just that — it’s an investment to serve our clients. It’s not an expense,” he says.

In his focus on the long term, he’s not alone.

Tash Elwyn, president of the employee channel at Raymond James, says his firm has been facing the same hurdles as others in the industry. For the quarter ending March 31, the firm reported a mere 1% year-over-year increase in total revenue for its Private Client Group (though it notched a 10% increase in pretax income due to greater expense control).

Elwyn says that to push past current headwinds, the best strategy is to continue to find ways to better enable advisers to serve clients.

“Said another way: While we are certainly a for-profit publicly traded company, our focus is not, and will not be, on quarter-to-quarter decision-making. Rather it will be well-rooted in our culture, which is that our clients, our advisers and ultimately our shareholders will be well-served by a long-term focus,” Elwyn says.


Meanwhile, adviser ranks across the industry increased a modest 1.5% from 2014 to 2015, according to On Wall Street research.

Kenton Shirk, associate director at Cerulli Associates, says part of the recent increase in headcount has to do with senior advisers taking on junior partners. “There are a lot of advisers that are getting older or getting more established in their careers. They have large client bases. And some of them are hitting capacity constraints,” he says.

However, the story at individual firms varies significantly. Merrill Lynch and Edward Jones boosted their adviser ranks 4.6% and 3.6% respectively through recruiting and training new advisers. Merrill’s growth even outpaced that of Raymond James’ fast-growing employee channel, which grew by 4.2%.

Baird, which grew its adviser ranks to 872 in 2015 from 816 in 2014, did so in part through its robust training program. Erik Dahlberg, executive director of Baird’s Private Wealth Management branch system, says that this effort in combination with traditional recruiting is essential for long-term growth. And it requires a steady commitment.

“We are making an investment in youth for the next 10 years. That’s huge. But is there benefit tomorrow? No,” he says.

Dahlberg says that training the next generation will also boost future asset growth because younger advisers will eventually replace older advisers who tend to accumulate fewer assets when approaching retirement.

“Asset flow is a problem for the Street, and the main reason is demographics,” he says.

M&A deals were another key factor in some firms’ growing adviser ranks. Stifel made two acquisitions last year: Sterne Agee, an independent broker-dealer based in Birmingham, Ala., and Barclays’ U.S. wealth management unit. As a result of those deals and other recruiting efforts, Stifel’s adviser ranks totaled about 2,900 for the first quarter of 2016, up from about 2,100 a year ago.

Chief Executive Ronald Kruszewski says he doesn’t have plans for additional acquisitions, but adds that new regulations such as the Department of Labor’s fiduciary rule could change the playing field.

“Regulation ultimately increases costs on smaller firms. I think some will choose to partner and that will create opportunity,” he says.

Wells Fargo took a different approach with Credit Suisse, landing an exclusive recruiting arrangement that gave the wirehouse the inside track on the Swiss firm’s roughly 250 U.S.-based brokers. Wells Fargo offered these advisers up to 300% of their trailing 12-month production to move, according to people familiar with the matter. Yet many advisers passed on Wells Fargo, opting to join other firms. According to insiders, many felt the wirehouse was not a good fit for their practices.

The firm recruited approximately 110 advisers, according to a spokesman.

Mack says the firm knew that not every adviser would be a good fit: “We hired almost exactly as many as we had hoped.”

Terms of the deal were not disclosed, but the real beneficiary may have been UBS, which recruited more than 100 Credit Suisse brokers, according to people familiar with the matter.

Brian Hull, head of the Client Advisory Group at UBS Wealth Management Americas, says it was a unique “market opportunity” for his firm, which reported that its headcount rose from 6,997 advisers in 2014 to 7,140 in 2015.

“I would tell you that if they didn’t make a decision to get out of the business, then there’s no way we would have been approaching those kinds of people. They had to make a decision,” Hull says.

Raymond James, meanwhile, will complete its acquisition of Deutsche Bank’s U.S. Private Client Services unit later this year. Members of the firm’s leadership say the unit, to be renamed Alex. Brown, could become the springboard for expanded recruiting efforts among elite advisers. Average production of a Deutsche adviser is $1.5 million, according to a recent Raymond James presentation.

Raymond James COO Dennis Zank says he would not be surprised if the unit’s headcount doubled over the next five to seven years, noting that it has offices in key locations, such as New York, and a “solid management team” that is making the move as part of the acquisition.

“This is just another way for us to build out the breadth of our platform. It’s a 200-year-old name that is highly regarded,” Zank says, referring to the Alex. Brown business that Deutsche acquired in 1999. “We think it will be attractive to certain advisers in certain markets. We’re not interested in stagnation. We’re interested in growing the business in a methodical way.”


There’s another arena in which more deals may be forthcoming: robo advisers. These digital startups remain small relative to the wirehouses. Betterment oversees about $3 billion in client assets whereas Bank of America Merrill Lynch oversees nearly $2.5 trillion. Still, they are expected to grow quickly. Traditional firms are treating the threat seriously and are working on their own robo-inspired solutions. In February, RBC partnered with BlackRock’s FutureAdvisor to pair the firm’s robo platform with RBC advisers.

And in May, UBS partnered with the technology developer SigFig to develop digital advice tools for its advisers. The wirehouse says it’s not developing a stand-alone robo adviser platform; instead the deal will yield new tools, and focus on making advisers more productive and clients more satisfied with their service, says UBS Americas President Tom Naratil.

“As client needs and desires start to change — and they will change quickly as they experience new technology — we will be able to meet those needs and desires very quickly,” Naratil says.

The other wirehouses may follow suit later this year, according to people familiar with the matter.

Mack says technology upgrades are a “huge priority,” noting the investments that Wells Fargo has been making to improve its adviser and client-facing software. On robos, she declines to go into detail, but says Wells Fargo is considering all of its options.

“We will have a robo solution as quickly as we can have a great client experience,” Mack says.

Stifel’s Kruszewski emphasizes the importance of the human element in financial advice.

“I believe the challenge for wealth management is to use technology to make it easier for you to organize and plan your wealth — to help you achieve your goals, which are not necessarily linear on/off decisions,” he says.

Kruszewski says his firm is also looking at how to better use technology to enhance the client experience as well as provide advisers more robust tools.

“I start first with client choice,” Kruszewski says, adding that robos have a place in the market and clients may be changing in how they want to interact.


On that point he’s not alone.

Alois Pirker, research director at Aite Group, emphasizes that client preferences are evolving and it’s not just mass affluent clients who want to interact digitally. Wirehouse and other broker-dealers increasingly find it necessary to respond to that. Pirker says robos will take some assets, although not an “outlandish” amount.

“But I think it’ll change the traditional firm’s model. And I think some firms will do better than others, and they will bring in the assets,” he says.

While asset growth may have been sluggish in recent quarters, the pace of transformation in other areas of the business is not slowing, and the ramifications of that will be felt across the industry.

“I think you’ll see the fast movers … pull something out of their hat,” Pirker says. “That’ll be the catalyst that sends shivers down Wall Street and causes people to start moving.”

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