What’s Changing at the Wirehouses—and Why You Need to Pay Attention
As firms cut back on recruiting and amp up their retention efforts, the balance of power shifts further and further away from the advisors—diminishing leverage, business value and opportunity, and leading down a path that advisors fear most.
A whole lot has changed in the wirehouse world, most notably in 4 key areas:
- Morgan and UBS left the Protocol just shy of 2 years ago, with rumors that Merrill Lynch is likely to follow suit—creating more risk and changing the process for advisors moving to other firms or models.
- Wirehouses are recruiting more selectively and far less than ever before—and firms like Merrill are focusing their recruiting efforts on low “LOS” advisors who will be paid a salary, thus creating a new generation of financial advisors who are not paid on a commission basis.
- Retire-in-place programs are being shored up, designed to incent more advisors to sign on earlier in their careers—essentially binding them and their teams for the next decade or more to the firms.
- And all the major firms are slowly but surely cutting compensation.
At the end of the day, it’s no secret that wirehouse firms want to keep their advisors captive. Recruiting top talent is expensive—and it’s far easier, and more profitable, for firms to focus on staving off attrition.
As an advisor who may have no foreseeable plans to move, you’re probably wondering, “Why does this matter to me?”
First and foremost, as more advisors are bound to their firms by the rigid handcuffs of retention, the more the balance of power shifts from advisor to firm—limiting the creativity and control advisors have over how they manage their businesses.
Currently, most every advisor’s employment agreement indicates that the firm owns their clients; practically speaking, advisors are really “at will” free agents with the power to determine how best and where to serve them.
The greatest concern on the part of most every successful advisor is losing the entrepreneurial spirit that has forever defined their business lives. Will they be turned into salaried private bankers who serve at the discretion of management without ownership and control over their businesses?
As firms “encourage” more cross-selling in order to maximize compensation, cut budgets for support staff, and bind an increasing number of advisors via sunset programs, the pendulum of control swings further away from advisors and toward the firms they work for.
With the progression of this transfer of power, the net-effect on wirehouse advisors could include the following:
- Cash compensation is cut and deferred further—and the firms could eliminate team grids where junior advisors would lose the benefit of their senior partners’ higher production levels.
- More draconian post-employment restrictions such as non-competes and Garden Leave—the most restrictive covenant that prohibits an advisor from contacting clients for 30–90 days after resignation.
- Next gen inheritors of retiring senior partners who sign on to retire-in-place programs could lose optionality—making them more expensive to recruit and diminishing the value of their businesses.
Essentially, what we’re seeing is the paving of a glide path for changing advisor compensation to salary-bonus for all.
And it marks the evolution of the wirehouse world—transforming it to one that’s far different than what it once was and what it is now.
The good news is that change begets more change, so as firms continue to tighten the ties that bind advisors, an expanded and exciting industry landscape yields plenty of options. For example:
- Regional firms are valid alternatives for advisors who want to work for a firm that is smaller and less bureaucratic than the wirehouses—that is, a world where compensation generally doesn’t change a lot and where advisors are viewed as clients.
- Boutique firms – like Rockefeller Capital Management and First Republic Wealth Management – are exciting middle-ground options for those who are intrigued by independence but want wirehouse-like support and transition economics.
- For those who desire to be business owners and have maximum control, the Independent Broker Dealer (IBD) and Registered Investment Advisor (RIA) space has gained mainstream validation as an option for advisors of all sizes—especially those managing assets in excess of $300 million.
- While concerns over the work involved with building a firm deterred many from exploring independence in the past, an entire cottage industry born to support breakaways has emerged, with service providers and custodians making transitions and start-up easier than ever before. Plus, many sources of capital have flocked to the space for those who want to capitalize early on or buy-down equity over time.
Certainly, change doesn’t happen overnight, but clearly we are seeing steps toward a wirehouse environment where advisors have far less control over their business lives. While many options exist elsewhere, staying put is also a very valid choice. In any case, this is not a time to allow complacency or inertia to drive the bus. Now is the time to pay attention and drive with your eyes wide open.