The financial crisis did curious things to Wall Street. Firms were gone overnight, once-powerful CEOs were never heard from again, and a whole new regime of power reorganized itself from the chaos.
This is the kind of environment in which typically buttoned up trade publications write headlines like the following: “How Merrill Lynch’s divorce of its own $2.5-billion team shows just how fed up the wirehouse is with RIA-bound breakaways.”
The “wirehouses” are big Wall Street firms. An “RIA” is a Registered Investment Advisor. And that headline is about a Wall Street firm kicking a $2.5 billion team out the door—allegedly for not telling their clients to buy into a hedge fund the firm was pushing.
Now the team in question can strike out on its own, something a lot of teams are doing these days for better or worse. Wealth management—once considered the boring part of Wall Street’s business—has become incredibly profitable. Big banks that doubled down on it after the crisis, like Morgan Stanley, are reaping the rewards.
But they’re also losing bodies to these “breakaways”—the independent channel—which will have increased by an estimated 15,000 people from 2007 to 2017 while big banks, regional banks and others will have seen their head counts shrink by the thousands.
So as you see, what we have here is a good old-fashioned debate about the best way to run money.
“While the [independent] adviser may initially be attracted by a higher payout,” said Gary Kaminsky, the Vice-Chairman of Morgan Stanley Wealth Management, “It’s never been clear how that benefits the client.”
What Kaminsky and Morgan Stanley are clear on is what they can provide—an “open architecture” format where their experienced portfolio managers can advise their clients on whatever products they want, the ability to design products, and access to an investment bank.
It’s a mix that’s been working for Morgan Stanley. Since the financial crisis the bank now has $2 trillion assets under management in its wealth management division. In the third quarter net revenues were up to $3.8 billion from $3.5 billion at the same time the year before.
“If we assume that institutional securities businesses should trade at roughly 10x earnings, that implies MS’s wealth and asset management business trades at a several turn discount to peers,” said a recent report by UBS. “Separately, we believe MS has a far stronger WM franchise and brand than the regional brokers and actually should command a premium.”
This has made Morgan Stanley the envy of the Street—and even Goldman Sachs, more identified with its trading culture, is getting into the game.
“At the end of the day advisers who have tried the independent route find they spend the bulk of their time on operations, HR etc.,” Kaminsky added. “When they leave the full service world they are disappointed.”
It’s true, the challenges of running a business while also running a portfolio can be daunting, but advisers that have left say that the independence to manage their businesses the way they like, the freedom to invest the way they like, and of course—the economics are better for them.
“The opportunity to maintain more of the revenue and balance your own profits & losses. Your net payout is not determined by corporate structure, rather how well you manage your growth and expenses With payouts ranging anywhere from 85% to 100% depending on your business structure, the independent model has far greater potential upside,” said Guy Adami, Chief Market Strategist at Private Adviser Group.
Private Advisor Group represents a sort of middle ground. It’s a network of advisors that pool resources and support to create a community.
This is an idea that’s catching on quickly. Instead of striking out on your own entirely as an independent, you join up with a firm that helps you with the back and middle ends of your office—with your marketing, with your business model, with financing and getting a good price on investment products.
Dynasty Financial Partners, an emerging powerhouse in this space, handles everything from vendor relationships and oversees expenses for members of its networks. It will find a member’s office, set up their website, and take care of issues regarding succession.
“We are entrepreneurs ourselves, serving entrepreneurs,” said Dynasty CEO Shirl Penney, adding that his members get the bonus of being a part of a community of business people working toward a common goal.
As for the clients his members serve, Penney said that they benefit from separating where products are made (inside investment banks) and where they are sold.
That’s something he believes clients are beginning to understand more and more.
“Assets in our industry are only going one way,” said Penney. “And the life blood of our industry is assets.”
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