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Following the Signs of Change

By Steven

The signs are clear, but few firms are reacting accordingly. The financial crisis is forcing firms to react and make changes to their short-term and long-term strategies. The two most important trends that firms need to consider are:

1.The increased importance of the research analyst at wirehouses
2.Further migration of advisors to independent b/ds or creation of RIAs

1. The increased importance of the research analyst at the wires - We see that the largest distributors continue to consolidate. These consolidations only further the importance of the research analysts in the product selection process. The remaining wires and associated banks are going to rely further on process, rather than individuals picking investments for their clients. Assets are going to flow through packaged products and select lists rather than individual mutual funds.

Surprisingly, only 30% of firms are expanding their National Accounts teams, while 40% are planning to increase their wholesaling force. If the average cost of an external wholesaler is $372,000, while the average cost of someone in National Accounts is $250,000, the math is clear: firms should reallocate their resources to their National Accounts teams.

2. Further migration to independent firms or creation of RIAs - We will see more of the large advisor teams move to create their own RIA, or move to an independent broker dealer, such as LPL. These advisors want higher payouts and more investment discretion, which they can't get under the wirehouse structure.

These signs are directing product manufacturers to create a dedicated RIA sales force as well as reallocate some of their wirehouse-focused wholesalers to the independent channel. Successful RIA sales teams usually operate much more like a National Accounts team, due to the institutional nature of the sales. On the independent side, firms have been very successful with hybrid teams. In the worst case, a hybrid will get 50% of the production at 50% of the cost. In a best case scenario, the hybrid will yield the same production as an external for roughly one-third the cost.

The financial crisis will divide the winners from the losers. The firms who best read the signs, and who make the right short-term and long-term decisions in response, will be the ones to come out stronger after the crisis.