As I looked at the prospectus cover of the recent General Motors mega offering, I was struck by what was missing. Gone are the firms that for years were that fabric of our industry. In the last two decades major players such as E.F. Hutton, Prudential-Bache, Dean Witter, Paine Webber and Smith Barney have been victims of consolidation. Important boutiques like Bear Stearns, Lehman and Kidder Peabody are either gone or under new ownership. Regional firms, too numerous to mention, have been devoured by the surviving few.
Factoring our tendency to glorify the past, I constantly hear veteran advisors speak passionately about the "wonder days" working for one of the firms of yesteryear. They like sharing fond memories of exciting times when firms were smaller, had personalities and were lead by unique characters. It was an era when many of the cultures positioned advisors to be more like entrepreneurs than employees.
After decades of consolidation, we now have four major wirehouse firms, which each work hard to articulate how they are different, and thus superior. Many advisors, however, feel that they are all pretty much the same: large institutions that operate in an environment of increasing regulatory oversight.
As in most industries, when financial service firms become larger, they trim their risk profiles. As such, the big four have created more controlled environments governed by the increasing numbers of policies and procedures. I suspect the majority of the representatives find that their businesses fit seamlessly within today's wirehouse space, but a growing number feel frustrated and are demanding something different.
The ongoing flight to independence represents the most radical reaction to the modern wirehouse culture. Although it is hard to get exact statistics on the size of this movement, LPL, the largest independent, has grown over 300% in the past decade. Independent firms offer-among other things-ownership, self supervision and the ability to brand oneself. It could be argued that these cultures are the most entrepreneurial ever available to the financial consultant. However, with independence comes duties and responsibilities that are sometimes not right for everyone.
Running all aspects of a business seems overwhelming or distracting to many. Others need access to products and services not commonly available to independents. Some tell us that their clients require the presence of a major national brand.
But it is not surprising that interest in boutiques firms has accelerated. They appeal to advisors who want to work with a smaller sales force at a firm with a known brand and meaningful cachet. Their cultures tend to be less controlling and they present opportunities to work more creatively.
At the same time, most allow their brokers to interact more freely with various departments of the firm. In this arrangement, the firm can become a valuable source of products and information. Furthermore, the active interplay between advisors, investment bankers, analysts and others can result in the firm referring clients to their retail brokers. Since most boutiques are looking to hire only top producers-and most of this group has been generously retained in recent years-growth in the boutique space has been nominal. Many of these firms have high minimum account sizes and want only those who concentrate on a small number of high-net-worth relationships. As a result, most advisors find that their businesses are not a good fit.
Many of the surviving regional firms are growing in this environment, as they too offer an advisor-friendly, open culture. Being smaller, they generally are able to operate effectively without overwhelming their advisors with frustrating rules and regulations. Larger firms with more advisors, tend to have had more compliance issues over time. The rules of an organization are often a reaction to problems, and so it not surprising that the big guys have more red tape. In addition, the smaller regionals are able to have a personal relationship with their branch managers and advisors.
When management knows everyone, it is possible to have a trust-based culture. Many advisors feel more empowered when they know senior management and feel that they are a trusted teammate. It is hard for most advisors to have that type of relationship in a firm where they are one of several thousand.
In an era when smaller seems better, we have seen a number of new firms emerge; and several are succeeding. I cannot recall a time when we have heard from so many start-up firms. Whether it is an RIA, a hybrid, an independents, or a combination thereof-new is different, and thus of current interest.
Aside from the intimacy offered by these smaller firms, two common themes seem to dominate the most successful of these offerings: freedom (the ability to access products and services from a variety of sources) and ownership (allowing the control of succession planning and potential wealth creation).
Today's technology allows us the freedom to access multiple platforms and streamline reporting. Ownership puts advisors in charge of the terms and method of their retirements. The latter is a vital consideration to our aging workforce. Many start-up firms, however, find it hard to compete financially in today's high-priced recruiting environment. They also face a lack of brand recognition and advisors often worry that clients will not follow them to a new and unknown destination.
The boutiques are in demand, the regionals are growing, start-ups are blooming, and the independent space is exploding. Conversely, the big four's growth seems to have peaked in 2008, followed by two years of decline.
So what can they do to accommodate that advisor who wants to be part of something smaller, have ownership, and requires more freedom? I think the answer is clear. They should follow Wells Fargo's lead and create independent divisions. Rather than leaving a wirehouse to go independent, one could simply transfer to their firm's independent division. Both advisors and clients would be able to avoid the stress of changing firms, and wirehouse retention rates would improve.
William Willis is president of Los Angeles-based recruiting firm Willis Consulting.
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