After all the turmoil in Wall Street firms last year it is no wonder that wealthy investors are considering other options. Lehman Brothers failed. Bear Stearns failed. Merrill Lynch (where I began my career) was acquired in a shotgun wedding by Bank of America. And, Morgan Stanley and Goldman Sachs were forced to reorganize as bank holding companies.
That’s not exactly a record of stability.
For many years, brokerage firms have been trying to keep investors from fleeing to independent financial advisors, also know as registered investment advisors. Initially, the big brokers just ignored the whole ‘fee-only’ practice of rendering investment advice. Now, that has changed and the big firms all have significant investment advisory practices. Despite the new focus on advice, Wall Street firms still appear to be losing the battle, according to this piece from Bloomberg [emphasis added]:
Investors Lured Away as Brokers Battle to Keep Them (Bloomberg, November 17, 2009, Alexis Leondis)
…Independent registered investment advisers are expected to gain about $50 billion in assets this year, in contrast to full-service brokerage firms, whose assets are projected to decline by $189 billion, according to Boston-based consultant Cerulli Associates.
"¦"The retail side of the brokerage business needs to come up with something new and sexy and that's why they're pushing wealth management now," said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York.
I cracked up when I read the good professor’s idea that brokerage firms need something new and sexy. I agree that wealth management or fee-only financial advice is something well worth offering. After all, that’s what I’ve done since 1987.
But, calling for something new and sexy? I think all the emphasis on glittery, glamorous new offerings is what has done in Wall Street.
Complexity & Wall Street
Based on my experiences, I view complex new offerings from Wall Street with even more skepticism than I do new operating systems for my computer. If it is new, complex and from Wall Street, I generally pass.
Bloomberg continues:
Until brokerage firms move to fee-based compensation entirely, investors will continue to be sold investment products such as annuities, mutual funds or new stock issues, rather than have their wealth managed, Geisst said.
"¦Registered investment advisers, who are regulated by the U.S. Securities and Exchange Commission, may offer guidance ranging from tax planning to retirement savings and usually charge a fee based on assets under management. They are required to adhere to a fiduciary duty standard, which means they are supposed to put clients' best interests first, according to the 1940 Investment Advisers Act.
"¦"Despite their efforts to show otherwise, one size fits 20,000 is still endemic at the wirehouses," said Barnaby Grist, head of strategic development at San Francisco-based Schwab Advisor Services, the Charles Schwab Corp. unit that supports about 6,000 registered investment advisers…
In fairness to the big brokerage firms, they do face the issue of scale. That is, a firm with 10,000 brokers (or representatives or financial consultants) will almost certainly have fairly rigid systems for compliance, trading and research. That very size can make it more difficult to customize advice for an individual client.
Bloomberg continues:
"¦"The wrapper and presentation may have changed to prevent the runoff of clients," said Jeffrey Shulman, chief executive officer of Shulman, Jones & Co., an accounting firm in New York"¦"It's too early to tell whether they're really motivated by client relationships rather than production."…
Ouch. That last comment undoubtedly stung any brokerage firm folks who read it. And, again, there are many good people working in big brokerage firms. I know because I used to be one of them.
Brokerage firms love to talk about their devotion to clients, but the need to sell financial ‘products’ has been a significant problem for decades. In fact, that issue — pressure to push product — is what caused me to leave Merrill Lynch 26 years ago.
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Mr. Brouwers has identified a an accurate observation of the big and not so big brokerage firms. While I have loyatly to a couple of individuals at these firms I am continually thinking I need to close my accounts and go with a financial adviser on a fee basis.
You’re really an uninformed individual. I have worked for a large brokerage firm for over 10 years now and have NOT been forced to “push” a product 1 time.
Thanks for the comments — pro and con. You three are the first commenters on this blog since the move to MarketWatch.com. Thanks for reading and commenting.
Kurt Brouwer is a fee-only financial advisor with three decades of experience. He is the chairman and co-founder of Brouwer & Janachowski, LLC. Kurt has written books, articles and hundreds of blog posts on mutual funds, ETFs and other investment topics. E-mail: kurt.brouwer *at* gmail.com.
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