Wirehouses’ Envy of Schwab Justified: Cerulli
The four wirehouses–Merrill Lynch, Morgan Stanley, UBS Wealth Management USA, and Wells Fargo Advisors–have reason to envy the growth rates of brokerages with a large self-directed customer base, including Charles Schwab, Fidelity Investments and Vanguard, a Cerulli Associates researcher said yesterday.
While retail financial advisor-segment assets under management across the industry had a compound annual growth rate of 6.7% from 2014 to 2019, self-directed segment AUM grew at a rate of 11.5% annually over the same period, according to a Cerulli analysis.
Self-directed platforms benefit from wariness some investors share about the value of financial advisors, Rose said.
Cerulli pollsters recently asked a survey of investors to identify “their biggest perceived challenges are working with advisors,” Rose said.
“One of the things that we see loud and clear is there is still a certain level of distrust of financial advisors and concerns regarding the objectivity of the recommendations, among those high-net-worth investors that are not using financial advisors, and among affluent investors,” Rose said.
As a result, Rose said: “Direct firms like Fidelity, Schwab and Vanguard are benefiting from a significant need among traditional wealth management firms and brands in terms of perceived trust safety or trust in pricing transparency, as well as safety.”
His point helps explain a number of recent actions taken by wirehouses, including Morgan Stanley’s promotion of E*Trade executives, Merrill Lynch’s decision to have advisor trainee candidates spend more time helping clients with the mass affluent and self-directed platform MerrillEdge before becoming full-fledged advisors, and both firms’ measures last quarter to stop disclosing how many of their wealth management professionals were grid-compensated advisors versus salaried-plus-bonus professionals. All steps were seen as blurring the lines between the traditional wirehouses and their discount brokerage competitors.
To be sure, the self-directed channel has benefitted from the retail trading frenzy over the past year as many investors were working from home and poured into ‘meme’ stocks and the broader market.
And wirehouses still dominate based on many measures of the marketplace, Rose stressed. They control 36% of the market share of investors with $2 million or more in investable assets, Cerulli analysis found.
The four firms also control more assets than the 16,000 registered investment advisory firms, he said. Since those higher net worth investors control 43% of the total investable assets, the wirehouses also have the highest productivity—with the largest share of assets per advisor—a boon for margins, he said.
Shedding clients is also something wirehouse advisors are doing well, which is another reason that the big firms are pushing them to segment some customers to self-directed or call center channels.
Wirehouse advisors are “the most aggressive at pruning their client base,” or asking clients to leave, Rose said, which allows them to free up time to continue moving up market.
“That’s maybe a lesson that can be learned across channels,” Rose added.