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Wirehouses floor it on technology at expense of recruiting

Not long before he retired, Lloyd Blankfein, CEO of Goldman Sachs, uttered six prophetic words: “We are a technology company.”

Since then, every wirehouse has echoed some version Blankfein’s Ich bin technologie declaration, signaling a seismic industry shift: A firm is no longer judged by its advisor headcount but by the quality of its advisors and the capabilities of its technology.

“The number of advisors no longer serves as a way to predict or drive revenue,” said Andy Saperstein, CEO of Morgan Stanley Wealth Management, at the firm’s annual U.S. financials conference in June.

Indeed, wirehouses have scaled back on recruiting in favor of investing in artificial intelligence, machine learning, robotic processing automation and other non-human digital resources. The shift helps their current advisors manage risk and improve the client experience in the service of garnering and servicing ever more assets. In 2018 Bank of America spent $3 billion on technology; Morgan Stanley has just introduced new account aggregation and risk management software.

This is a radical departure from the past when major wirehouses battled for high-end advisors even when the rest of their organizations were under hiring freezes. In this regard, Wells Fargo, emerging from reputational challenges, remains the only holdout, hiring across most production levels.

The shift away from recruiting and toward tech will likely continue, accelerating another ongoing industry trend: the creation, consolidation and growth of high-end advisor teams at the expense of the single advisor, which used to be the norm at wirehouses.

In 2017, for example, 61% of advisors worked on teams, up from only 56% in 2014, according to Pricemetrix data. At Merrill Lynch, some 77% of firm advisors currently serve on teams, according to Barron’s. Merrill is focused on hiring salaried advisors for its Merrill Edge unit and newbie up-and-comers for its private client group. Merrill Lynch’s model differs from that of Morgan Stanley and UBS — but it still renounces the idea that an ongoing recruiting program directed toward established producers should be a focal point of a firm’s efforts to grow revenues.

That’s because wirehouses, spending big bucks on upgrading advisor technology, view high-end teams as most likely to deliver the best return on their investment, and will likely encourage more advisors to team up in the future, especially supporting the growth of “mega” teams that can more fully leverage their technological prowess.

Mega teams (roughly defined as those that manage more than $300 million in assets) already control a disproportionate chunk of industry assets. Cerulli notes that those with more than $500 million in AUM control nearly two-thirds of advisor managed assets although they make up just 11% of the advisor population. That percentage will only grow as wirehouses focus on supporting the efforts of fewer but bigger advisors.

The good news is that cutting-edge technology will help many advisors reach stratospheric levels of gross production. Some industry players feel that, one day, $50 million-plus teams will be part of the advisor landscape. What’s more, high-end advisor teams will come to rival asset management firms as they control humongous pools of assets.

Wirehouses will expect more productivity from their advisors and will continue to place their goal posts higher. They will view their unique technological competencies as a key retention tool.

As teams proliferate, deciding which team to join or whether to build a team will become an increasingly critical career decision for an advisor. Increased teaming will warm the hearts of wirehouse executives who see successful teams as providing a superior client experience and strengthening client bonds with the firm. (And, teams are a lot less portable than the lone wolf advisor of old.)

Providing first-rate tools to a smaller group of high-end advisors is now the name of the game. Wirehouses will continue to invest huge sums of money to provide their advisors with a superior technology platform. This will enable many of their advisors to bolster their production to stratospheric levels and the client experience should improve as well.

But the days of the wirehouse solo practitioner are rapidly drawing to a close.

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