Posted On: April 6, 2012 by Shepherd Smith Edwards & Kantas LTD LLP

Wirehouses Struggle to Retain Their Share of the High-Net-Worth-Market

With their share of the high-net-worth-market expected to drop down to 42% in 2014 from the 56% peak it reached five years ago, wirehouses are looking to regain their grip. According to Cerulli Associates, Bank of America Merrill Lynch (BAC), Wells Fargo (WFC), Morgan Stanley Smith Barney (MS), and UBS (UBS)—essentially, the largest financial firms—will see their portion of the high-net-worth market continue to get smaller. Meantime, because private client groups can now be called the largest high-net-worth services provider, they can expect their hold to continue as they likely accumulate about $2.8 trillion in high-net-worth assets in two years—a 49% market share.

The Cerulli report says that the wirehouses’ reduced share of the market can be attributed to a number of factors, including the fact that high-net-worth investors are allocating their wealth to several advisors at a time. Also, during the economic crisis of 2008, many investors transferred some assets out of the wirehouses. There were also the wirehouse advisers that chose to go independent or enter another channel. In many cases, these advisors’ clients ended up going with them.

The private client groups are the ones that have benefited from this shift away from wirehouses. A main reason for this is that they are considered safer for both advisors that wanted a change and investors who were seeking lower risks.

Also, per the report, there has been healthy growth in the independent advisor industry. The registered investment advisor/multi-family offices grew their assets under management by 18% two years ago. Meantime, during this same time period, wirehouses assets only grew by 2%.

In other wirehouse-related news, beginning summer, ERISA Section 408(b)(2) ‘s new point-of-sale fee disclosure rules will make it harder for these firms to up the fees they charge investors. According to AdvisorOne, as a result, these firms are raising the fees that they charge mutual fund companies instead.

Wirehouses and mutual fund companies usually have a revenue sharing agreement. In exchange for investing their clients’ money in a mutual fund, a wirehouse charges the mutual fund company a fee (this is usually a percentage of every dollar that the client invests). However, in the wake of the upcoming disclosure changes, financial firms have started raising that fee.

For example, according to The Wall Street Journal, at the start of the year, UBS approximately doubled the rate that mutual funds must now pay. The financial firm is seeking up to $15 for every new $10,000 that a clients invests in a mutual fund. Moving forward, this will go up to $20 annually. Morgan Stanley’s new raised rate is $16 a year. It used to charge $13 for stock funds and $10 for bond funds.

Wirehouses are saying that since its the brokerage firms and not the individual financial adviser who gets the separate payment streams, the rate won’t impact the judgment of an adviser when it comes to selecting funds. Such fees paid by mutual funds can impact a financial firm’s bottom line. For example, last year, almost a third of Edward Jones’s $481.8 million in profits came from mutual fund company fees.

Wirehouses raise fees on mutual fund companies, AdvisorOne, April 5, 2012

Wirehouses Battle to Keep Market Share, On Wall Street, March 28, 2012

More Blog Posts:
Institutional Investor Fraud Roundup: SEC Seeks Approval of Settlement with Ex-Bear Stearns Portfolio Managers, Credits Ex-AXA Rosenberg Executive for Help in Quantitative Investment Case; IOSCO Gets Ready for Global Hedge Fund Survey, Institutional Investor Securities Blog, March 29, 2012

Citigroup Ordered by FINRA to Pay $1.2M Over Bond Markups and Markdowns, Institutional Investor Securities Blog, March 27, 2012

FINRA Bars Registered Representatives Accused of Securities Misconduct and Negligence, Stockbroker Fraud Blog, April 5, 2012

Contact our stockbroker fraud lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP today.

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