Despite Efforts, Wirehouses Losing HNW Clients

According to Cerulli Associates, wirehouses have been focusing on high-net-worth investors for quite some time—but not very successfully. In the last three years, wirehouses’ share of the HNW market has dropped by 11%, the research firm asserted in a recent publication. As Cerulli puts it, “Consumer distrust and dissatisfaction with these firms continues to linger.”

In recent years, the wirehouses have made a concerted effort to court the HNW market.

They’ve been employing only the most productive advisors, who serve the wealthiest clients, while cutting payouts for those advisors who take on new clients with less than $250,000 in investable assets, Cerulli reports.

Nevertheless, wirehouses held an estimated 56% share of the HNW market at year-end 2008, only to see that share plummet to 47% at year-end 2009 and keep sliding to an estimated 45% at year-end 2011.

"Although the wirehouses have actively put forward a profitability focus, this strategy assumes that they are effectively retaining high-end advisors and affluent investors," said Bing Waldert, director at Cerulli Associates. “A nearly $400 billion shift in market share among HNW investors over 12 months suggests that they were not successful at either."

Investors who name the wirehouses as their primary provider were also the least likely to be satisfied with their provider.

Wirehouse problems are not limited to the HNW market.

By not actively attempting to address clients under a certain asset threshold, wirehouses will inevitably lose some share to those providers willing to work with these investors, Cerulli concludes. "Traditional discount broker-dealers have been expanding their advice services in recent years, and these firms have benefited from the trimming of smaller clients by the wirehouses," said Katharine Wolf, associate director at Cerulli Associates.

In addition to focusing on HNW clients, wirehouses have attempted to bolster profits by increasing their "pay-to-play" fees in recent years. Cerulli states that the minimum charge for Morgan Stanley Smith Barney's platform is now $250,000, up from $50,000 in 2009. These moves might solve wirehouses' short-term profitability concerns, the research firm contends, but they are causing asset managers and product providers to reconsider how they spend their distribution dollars and resources.

"Product manufacturers are right to call into question rising prices to access an eroding asset base, but the four wirehouse firms still represent the largest opportunities for manufacturers for the foreseeable future," Waldert said. “However, there are improvements that need to be made if these firms wish to maintain their industry leadership position in the long run."

The key takeaway from this Cerulli report: wirehouse tactics to raise short-term profits may be causing them to forsake their long-term domination of the industry.

Donald Jay Korn writes for On Wall Street.