For advisors, 2018 was all about adapting to major transformation. For firms, it was about the battle for control which left advisors at a crossroads of accepting themselves as agents of their firms or crafting creative ways to break free.
Quite a bit of movement characterized this year, especially among top-of-the-food-chain advisors. By our count, 24 $1 billion-plus teams have moved to date, only two of which went to another wirehouse. Leading the uber-competitive recruiting race were First Republic Wealth Management, JPMorgan Securities, RBC Wealth Management and the independent space.
Without a doubt, the biggest loser was Wells Fargo; the blemish on their brand
Wells is also looking to catch more of those migrating from the employee-to-independent space, with the launch of an RIA channel. They are the first wirehouse to take this significant step.
Here are six crucial areas to watch over the next year:
1. Where are deals headed?
The high-water mark deals at traditional firms are currently at 300% of trailing 12-months production, and, in some cases, even higher. With the race for top talent as competitive as ever, even independent broker-dealers have been forced to up their ante by offering forgivable loans anywhere from 15% to 50%. The RIA space has responded with numerous ways to create liquidity right out of the gate.
Dynasty, Raymond James and Stifel are among the biggest beneficiaries of recent advisor moves.
With the expanded waterfall of possibilities, every firm has been forced to raise the bar. We expect top teams will continue to command top dollar, pushing the current boundaries of deals past the high-water mark.
2. Big firms will get bigger, while smaller firms will need to find a way to compete or become attractive acquisition targets.
The ability to operate a profitable and scalable firm will become increasingly difficult. As evidenced by the recent announcement of Baird’s intention to acquire the wealth management unit of Hilliard Lyons, we fully expect to see more firms with sub-scale businesses become acquisition targets. Those impacted the most will be advisors who work for these firms and prefer being the big fish in a smaller pond; this will be another driving force in advisor movement.
Big brokerage houses will continue to acquire and get bigger, seeking out firms that are struggling under the weight of compliance and the inability to compete. Top RIA firms will be among the most prolific acquirers.
3. Brokerage firms will continue to work toward keeping their advisor force captive.
Strategies designed to stave off attrition and tighten the ties that bind advisors to their firms will continue. Firms will use retire-in-place programs to get their advisors to commit to the next decade or more, with their businesses and clients as part of the package.
It’s golden handcuffs like these that have the potential to turn wirehouse advisors — who have control over their business and the way clients are served — into private bankers who serve at the discretion of management. Essentially, the net result is a shift in the balance of power from the advisor to the firm, creating greater limitations on any leverage the advisors have.
4. There will be acceleration of the breakaway movement, but not without some headwinds.
Movement toward the independent space will continue to accelerate, driven by the desire among advisors for greater control and freedom, and to serve their clients as true fiduciaries.
Also driving momentum is the cottage industry built to support breakaways — making business startup and management far easier than it was in years past. Custodians, service providers, broker-dealers, product manufacturers, consulting firms and a healthy supply of sources of capital are all part of this burgeoning ecosystem. This is a true testament to the stability and growth of the independent space.
But there are headwinds: While fear and inertia are always powerful deterrents to movement, a significant threat comes from the aforementioned “retire in place” programs offered by brokerage firms.
5. Advisor sentiment is shifting.
There was a time when advisors credited the growth of their business to the name- brand firm for which they worked. But as big brokerage firms got bigger and compliance became more about managing to the lowest common denominator, that sentiment changed.
Advisors now place the highest value on the freedom, flexibility and control to run their businesses as they see fit, exercising their ability to be true fiduciaries with access to the whole of the market to serve their clients’ needs.
So when advisors are looking to move, they’re choosing models that are closer matches to this new ethos, oftentimes regional and boutique firms or independence, not wirehouses. This evolved sentiment is driving advisors to pay more attention to the longer-term potential over the short-term windfall of a recruiting deal, and fueling the growth of independence.
6. A more sophisticated and educated client demands change.
The days of clients seeking out firms because of their brand names are waning. More informed clients recognize that their relationships are with their advisors, and expect that these advisors are indeed true fiduciaries.
Looking forward, these evolved clients will increasingly demand that advisors act as their client advocates, rather than product advocates for their firms.
And this is by far one of the most important trends we’re seeing. It’s the notion of putting clients first that will help break down the power struggle between big firms and their advisors. But it would mean changing the lens through which firms view business and drive decisions from here on out.
As evidenced by the success of independence, firms that adopt a model based on client advocacy over products and profit are likely to be the real winners for years to come.
