Should auld acquaintance be forgot... even if it's a couple years overdue. That's what industry experts say major financial advisors should be singing as we ring in 2011.
After a year filled with slow overall growth and shifting hierarchy with the integration of big names like Bank of America Merrill Lynch and Morgan Stanley Smith Barney, the industry should be ready with more efficient business models and potentially higher profits in the coming year.
As 2011 unfolds, one wirehouse leader could emerge, as firms put new business models to work and leverage technology to better use overlapping assets.
Competition for the top wirehouse slot will start to play out in 2011 between MSSB and BofA/Merrill Lynch, says Aite Group Research Director, Alois Pirker.
That competition will not only mark the dueling of two firms, he says, but also two new business models. Merrill Lynch is now working to build cross-selling bridges as part of their integration, while Morgan Stanley is still involved in heavy lifting integration, he says. Merrill Lynch, a previous leader in brokerage, now operates more like a retail bank, while Morgan Stanley is now a pure play investment firm with an investment bank-owned brokerage.
The competition between them will not only designate a top firm, Pirker says, but also show whether the pure play model can withstand the aftermath of the meltdown.
While it will be too early to tell which firm will be number one, an early indicator this year will be their ability to attract assets, Pirker says. Morgan Stanley is particularly poised to take on a greater role in setting the pace for the industry, he says.
The coming year will also see technology take on a greater role for efficiency and profitability.
MSSB has been working to maximize its in-house expertise through features like an internal social network for advisors to connect, says Sean Cunniff, TowerGroup Research Director. Through the offering, specialist advisors create profiles so that other advisors can call on them for areas of expertise, such as divorce, estate and retirement planning.
Firms are also looking at making their advisory practices more efficient by linking their advisor tools, Cunniff says. That way, data from customer relationship managing can be put into financial planning and automatically fed into a portfolio management tool. Repeatable business processes, such as account openings, are also being evaluated for potential automation, which could streamline processes and allow for certain aspects, like auditing, to be built into the workflow.
A renewed technology focus also could lead one of the wirehouses-particularly MSSB or UBS-to start using third-party technology in 2011, says Chip Roame, managing principal at Tiburon Strategic Advisors.
The most likely choice would be fee-based technology platform provider Envestnet of Chicago (which recently went public), Roame says.
Yet another platform that could potentially impact the market this year is Merrill Edge. That technology, aimed at the mass affluent, works to combine a banking and a brokerage product. Merrill Edge may tap into Bank of America's existing customer base and serve as new competition for online brokerage sites.
Technology tools used by an advisor could also have an affect on another major aspect affecting a firm's profitability into 2011: advisor retention.
As firms continue to vie for top talent-from large wirehouses to independent firms like HighTower-the advisor still has a choice of whether to stay under the roof of a large industry name, or strike out as an entrepreneur. But when an advisor's practice becomes so embedded with one planning tool, it is harder for them to take that practice and go somewhere else, TowerGroup's Cunniff says.
At the same time, however, those advisors could also be lured to other firms as industry technology acceleration now means that platforms, previously available only at wirehouses, can be found everywhere, from Fidelity to Schwab to Pershing, Cunniff says.
Retention will continue to be key, as firms aim to be first in line if markets gain new enthusiasm. "We are going to see a switching [mindset] into, 'Okay, let's kick off the growth phase,' and hopefully the markets will play along with it as well,'" Pirker says.
"The consumers will hopefully get more adventurous. Firms want to be ready for that; with new business models, be in the new infrastructure and be ready to cash in on the opportunity," Pirker adds.
With advisor forces expected to stabilize somewhat this year, it will be important for wirehouses to also consider cutting the high signing bonuses that also prevent profitability, Pirker says. "That's certainly some goal that large firms should have over the midterm, or as soon as possible," Pirker says.
In order to avoid paying advisors excess money, particularly up front, Roame says firms could consider creating more competition through recruiting bonanzas, or creating open markets within their firm for advisors' businesses.
As the industry hierarchy resettles-with top firms vying for the top slot and independent firms luring more talent-UBS, a firm that falls in the middle and has sustained large losses, will be important to watch, sources say.
UBS' wealth management revenue declined in the third quarter of 2010 to $506.9 million in pre-tax profit. As a result, whether the firm will become a buyer or a seller this year remains an open question. "I don't see them acquiring anybody because the Swiss mother ship just doesn't want to throw any more money at that," Pirker says of the losses the firm has already sustained.
Roame, however, says he thinks UBS will be a buyer in the coming months. "I also wonder if they could not create some cool brokerage/private banking model that does not exist in the market today," he says.
"But given that they have hired all wirehouse folks, that seems unlikely," Roame says, adding, "that would call for a group of innovators."