Wirehouses and RIAs—Will They Meet in the Middle?

The primary driver of this movement toward independence is advisors’ desire for more freedom and autonomy. Schwab Advisor Services recently released its “Supported Independence Study.” It found the top reason for considering independence, cited by 98% of those surveyed, was the freedom to do what’s best for clients.

That includes the freedom to:

• Provide more personalized service
• Control communications and marketing
• Ensure clients are taken care of well into the future

All these factors were cited by at least 94% of the advisors surveyed.

These trends are likely to continue. According to Cerulli, wirehouses controlled 31.4% of retail assets at the end of 2022, but by 2026, that share is expected to drop to 29.3%.

The Wirehouse Response

Historically, the wirehouse response to this trend has been to throw money at the problem, increasing compensation and other incentives to get advisors to stay in place. The numbers suggest that this approach has not stopped the flow of departures, however.

This is understandable. Many departing advisors are already well-off financially. They expect to be even better off after making the leap to independence, so a bump in their paycheck may not slow them up much on their way out the door.

Wirehouses have also made departure more difficult, by putting up as many obstacles as possible to deter those eyeing independence. Gnarly employment contracts, retention of client data, and ultimately lawsuits are all tools used to raise the price of freedom. Yet the lure of autonomy dwarfs these risks in the eyes of many, and departures continue.

Wells Fargo took a more concrete step to reduce the damage caused by departing advisors by establishing FiNet, an independent business model, affiliated with Wells Fargo. FiNet would give Wells Fargo brokers an alternative to the traditional wirehouse model, offering more freedom while still receiving much of the support they are used to from the mothership . Wells Fargo also gives FiNet advisors a higher payout, though the firm still benefits by retaining the assets.

Wells Fargo has also recently announced its intention to establish an RIA custody business. The firm acknowledged this as a defensive move when it made the announcement. If an advisor is planning to leave, better to at least retain the assets.

This is not the first time a large brokerage firm has attempted to enter the RIA custody space. Raymond James has done so, and Merrill Lynch and RBC both made failed attempts years ago.

The big brokerage firms have been slow to make structural changes designed to stem the tide of departures or reduce its economic impact. But it does not take much imagination to envision a day when they all take action to establish affiliated business models designed to reduce the number and impact of these defections.

Begrudging as these actions may be, these firms are ultimately bottom-line driven. The draw of independence will not abate, and the path to achieving it is now a well-worn one with an army of consultants, outsourcers, and technology providers eager to help.

Increasing consumer awareness of the conflicts associated with the traditional brokerage firm model may add pressure for alternative business models. In the end, the economic impact of doing nothing may simply be too great.

Winds of Change in the RIA World

About 25 years ago, Mark Hurley created a storm by predicting massive consolidation in the RIA space that would eliminate all but about 100 viable firms. His prediction did not come true in its full glory, but the move toward consolidation is certainly upon us.

Early players like Focus Financial and Hightower have now been joined by a multitude of newer entrants in the consolidation game. Some do outright acquisitions, some do partial acquisitions, and others provide platform services and infrastructure for a fee.

The variation in business models for consolidating firms is significant. Those looking to make flight from the wirehouses can easily find a home to suit their needs and preferences.

To attract the most desirable breakaway brokers and teams, these consolidators must provide them with all the comforts of home. The breakaways may want freedom, but not at the expense of access to the products, technology, and services they are accustomed to. Building the necessary infrastructure and attracting the talent to support it is expensive.

This is where need meets opportunity. The consolidation frenzy is being fueled by private equity firms eager to enter the wealth management space. They are attracted by the recurring revenue nature of the business and the perceived opportunities for scale and efficiency. They provide the capital, but on their terms.

The focus necessarily becomes more about the bottom line and the profitability of the enterprise. Much like the wirehouses, the goal becomes maximizing shareholder value.

Consolidation has already had an impact on the size and shape of the RIA market. A whopping 93% of all RIAs reportedly have less than $1 billion in assets under management, while the remaining 7% have over $1 billion in AUM. Yet the 7% with over $1 billion in AUM manages 71% of all RIA assets. And these larger firms employ 47% of all advisors.

Larger firms are clearly dominating the industry and their dominance is likely to only get stronger. A recent Cerulli study on wealth manager consolidation found that 15% of advisors were actively searching for acquisition opportunities and 37% were at least open to an acquisition. This means over half of all RIAs are potentially interested.

Where Will These Trend Lines Meet?

So, will the wirehouses and other large brokerage firms take meaningful action to create RIA-like business models to deter departures and possibly even turn the tables on the RIAs?

They have not shown a great inclination to do so yet, but their reluctance may be overcome if their best and brightest continue to take flight. They are, after all, duty-bound to maximize shareholder value, and this seems to inevitably require putting up a better fight than they have so far. It is certainly within their ability if they feel the heat sufficiently.

The consolidation trend in the RIA space is already well under way and has dramatically reshaped the landscape. In the process, the larger firms are necessarily becoming more wirehouse-like in their product/technology/service mix.

The way they balance their priorities has also made them more wirehouse-like. They now have significant duties to their capital-providing shareholders.

Will the new wirehouse business models and the emerging big-box RIAs be indistinguishable somewhere down the road? That seems a bit of a stretch. But as the competition for market share heats up, we could very well see the territorial maps being redrawn in surprising ways.

Perhaps the world will look more like the law firm or accounting worlds do today. A relatively small number of firms dominate the big-case, high-dollar-case market, while a large number of smaller firms make a perfectly good living handling what’s left over.

As always, my crystal ball is cloudy, but change is coming. Be prepared and think about how you will stake out your ground in the new world.

If you want to remain truly independent and run your own business, how will you compete with the large firms? If you are a large firm, how will you differentiate yourself and stay competitive if the mega-firms morph and head toward your turf?

The survivors will be those who anticipate the changes to come and adapt to the new environment. Small and large firms can both thrive together, but it will require a different set of skills than were required in the past. It’s not too early to make your plan.

Scott MacKillop is strategic advisor at GeoWealth Management LLC. He is an ambassador for the Institute for the Fiduciary Standard and a 48-year veteran of the financial services industry. For more articles by MacKillop, please visit: https://geowealth.com/from-the-desk-of-scott-mackillop/. He can be reached at [email protected].

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