Wall Street Eats Its Young / Make Them Pay
- Joshua M Brown
- October 29th, 2012
The following posts originally appeared on 8/10 and 10/22 respectively. They are two parts of a whole idea, a complete thought regarding the current and inevitably worse decline of the Big Firm wealth management hegemony that myself and my colleagues scratch and claw away at daily.
Enjoy – JB
A recurring theme on this blog is the necessary shrinking of the financial services sector in general and the aging decrepitude of the traditional brokerage business firmament. But each year there are less and less financial advisers and brokers at major Wall Street firms and the independent rep model is coming unglued as small firms struggle to stay in business.
And in terms of total industry headcount, how about these stats courtesy of Reuters:
Across banks, brokerages, insurers and other investment firms, the ranks of U.S. financial advisers fell by about 7,000, or 2.3 percent, to 316,000 last year. This downward trend is expected to continue, with those numbers shrinking by 19,000 people over the next five years, or 1.2 percent a year, according to research firm Cerulli Associates’ latest brokerage industry market share report…
The ranks of self-employed broker-dealers fell 14 percent last year to about 80,000, reflecting the difficulty of operating an investment business when clients made fewer trades and the stock market ended flat for 2011.
And those financial advisors who are surviving this Ice Age tend to be older and grayer – more so every year. The average FA in America is now 49 years old. And that number will likely trend higher in the near future, not lower.
Why is this happening? It’s quite simple, actually: Wall Street Eats Its Young.
I’ve spent the last week and a half following up with resumes we’ve been sent since posting an opening for a junior advisor. The good news is, the kids are alright. The younger generation joining the profession is going to be just fine – they’re smart, ambitious and almost every single one of them cited “doing the right thing for the customers” as a primary goal when I asked them what they were looking for out of a career in wealth management.
The bad news is that never before have the large firms and their priorities been so arrayed against this incoming class of professionals. Once-proud training programs at the wirehouses have degenerated into a glorified Hunger Games-like contest where the failure rate is somewhere between 80 and 90%. With all due respect, any endeavor that 90% of people fail at is categorically not a training program, it’s a massacre. A colossal waste of time for a young guy or gal who is trying to learn a profession.
But the firm wins and the dinosaur “vice presidents” who’ve been roaming its hallways since before the internet have a permanent upper hand. When a 25-year-old enters the program, it’s probably best if his dad is rich and has rich friends. If not, he is sat down in front of an antiquated dialing system where half the phone numbers are dead and the ones that are alive connect him to prospective clients who are dead. 500 phone calls in a day and less than 20 conversations is the norm, not the exception. This training period goes on indefinitely for many, they are running a race with no pre-determined finish line.
In the meantime, the broker must hit several different types of goals – new money raised (or “net new”), gross commissions charged in brokerage/insurance products or a certain amount of client assets successfully tucked into the fee-based platform. It is a triathlon and the target amounts set for trainees are impossible to the point that if they are hit, the elders are almost suspicious.
Now why, you may ask, would firms want to set impossible goals for trainees in their wealth management program and watch so many wash out each year? Because the assets and new accounts these kids do manage to bring in are swept up to the older advisors, it’s all part of the “loyalty program.” If you think the rich get richer in general, you should see the upside-down pyramid that the brokerage business has become. There are the established haves and each year a new crop of fresh-faced have-nots to be taken advantage of. The older advisors get away with this because they are consistently profitable to the home office and management keeps getting shuffled around anyway, no one wants to rock the boat. Also, to be quite frank, what client or prospective client wants to entrust their retirement to someone in their 20′s anyway? Graying temples are an asset in a business where hard-earned market wisdom is the primary selling point of the product (advice!).
Now there have been some notable new initiatives at the brokerages to restart their training programs and move into the 21st Century. They probably don’t want to resemble a Dickensian workhouse forever. Merrill Lynch is doing some interesting things with their Edge program, for example. The trouble is, each time the economy hits a rough patch, the first thing scrapped is the training program. These firms used to be legendary for the amount of talent that had passed through their programs, now they are a line item that gets chopped at the first sign of profit decline. Will the next time be different?
And for the young man or woman who does manage – against all odds – to become an actual advisor and be added to a team, the job that awaits them involves blocking-and-tackling for a senior advisor who has one foot on the golf course. There is the waiting game for more responsibility to be handed down as well as the familiarization process with the multi-level marketing scheme that the industry has become. There is a lifetime ban from social media and a regulatory regime under which creativity is frowned upon and innovation equals risk in the eyes of the complacent corner office managers. And if one is extremely fortunate and can make all the cuts as annual gross commission minimums go ever higher and the herd of non-senior advisors is culled each season, one can certainly make a great living and ultimately reach a position of security and stability.
But at what cost? What happens to the heart and soul of the energetic young kid who goes through that process? What compromises are made along the way and what awful truths about human nature and the priorities of the firm are accidentally revealed?
The tradition of mentorship at Wall Street brokerage firms has been displaced by a vampiric rite of passage where the juniors who don’t make it pay for the cost of the one or two who do. In the meantime, the big books get bigger and the future for these firms gets dimmer.
Can anything or anyone break this predatory cycle or is secular decline an inevitability?
I have a lot of friends and colleagues at wirehouse brokerage firms, some of them are among the best advisors I know. One of the biggest mistakes I made with my career early on was not beginning at a giant firm (I joined a small regional brokerage out of college instead, working with a family friend). So I offer this bit of advice to my wirehouse readers and friends with all due respect:
When negotiating with your current wirehouse firm or a new one you’re considering joining, please please please remember to make them pay. Make them pay dearly for your services and your presence. Make them dig deep to find the dough that makes it worth your while.
Make them pay with the full knowledge that you have more alternatives now than ever before. There is Raymond James and LPL. There is Elliot Weissbluth and his team at HighTower. There are the RIA-supporting brokers like Interactive, TD and Schwab. There is nothing you cannot get now – research, product, support or otherwise – outside of the wirehouse fortress walls. The advantages of size have been erased by progress and consumer tastes. Everyone knows it. Unless you enjoy pushing mortgage refis or structured products. In which case, the Herd and the Stagecoach cannot be beat. But otherwise…
Make them pay knowing full well that the system is crumbling anyway, with or without you. Please don’t take my word for it. Here’s Cerulli Associates (via AdvisorOne):
There were about 51,750 wirehouse reps as of year-end 2011, according to Cerulli, down from 56,900 in 2007. That’s a four-year compound annual decrease of about 2.5%. From 2010 to 2011, though, the wirehouse channel added about 700 advisors for a one-year growth rate of 1.4%.
This year’s study, the consulting group notes, included input from 6,000 advisors across a variety of FA channels, up from 1,500 in past years…Nonetheless, wirehouse advisors’ market share is dominant: Reps in this channel managed about 41% of total assets in 2011. This figure could drop to about 39% this year and 36.5% in 2013.
See. It’s already almost over. A loss of half their market share in six years. A melting iceberg, meanwhile the industry as a whole is almost back at its pre-crisis assets under management record highs.
Make them pay with the notion in the back of your head that their so-called brand is no longer a positive. The brand names of Wall Street’s largest brokerages (and what they supposedly stand for) are now neutral-to-negative in the eyes of the public. They did it to themselves, trashing century-old reputations slowly over the years and then all at once. You are the brand your clients care about. Don’t ever lose sight of that. The parent company changes its name or merges or spins-off or acquires but you are the face and the voice and the constancy that the client expects. The client cares much less about what your firm calls itself than you think.
Make them pay because the clients will never forget that when it really counted, these firms turned out to be a three ring circus of risk and not the fortress of mighty trees and majestic whales that their brochures are meant to evoke. Merrill Lynch lost $20 billion of its own money during one 12 month stretch during the credit crisis, in the year ended July 2008 it was losing a staggering $52 million per day. There are very few clients in your book who feel any loyalty or affinity to a place like that, no matter who’s taken the reins of the firm since then.
Make them pay knowing that, post-Facebook, the reality is that your clients have no interest in IPO access or banking schlock of any kind. What your clients already secretly suspected – that any “hot” product they had access to was probably poisonous – has now been reaffirmed. Your wirehouse’s entire banking and underwriting schtick has just been sodomized and lit on fire for a generation to gawk at, pitching it to a retail client will yield approximately zero dollars in new AUM.
Make them pay because you are over-burdened by needlessly draconian internal rules and regs to account for the “one bad apple spoils the bunch” mentality of your firm’s management. There are probably a handful of bad apples in your 10,000-strong national sales force. Unfortunately, the preventative medicine being applied by your risk-averse firm means that everyone gets treated like a rotten child who’s about to do harm at any moment. They’re playing Moneyball and you are just a stat, your years of clean business and dependability have earned you no benefit of the doubt or leniency from the hypochondriac compliance regime in force. And it will get worse, not better, as business conditions worsen and assets continues to flow out. Suspicion and scapegoating will become ubiquitous.
Make them pay under the realization that the people you answer to, the branch manager and the regional branch manager and so on, have no loyalty to you when push comes to shove. Their checks are signed by the home office and it is toward the home office that they face five times a day when lowering their heads in a submissive prayer. You will be passed over or fired at the drop of a hat should the home office will it. That smiling asshole whose shelves are lined with Zig Ziglar motivational books will be the one to do it. He may or may not even bother putting leaving the putter in his office when it goes down. Your email account will be turned off before he’s worked up the balls to level with you.
And so I say Make Them Pay. Big bucks, the money that you are worthy of and deserve. To hell with the home office and the public company’s grasping shareholders – get what’s coming to you and make that firm show you why you should keep your clients and your business in-house. You owe it to the clients to make the right choice. And if the right choice is to remain at a wirehouse, make sure that wirehouse shows you the respect and gratitude you deserve for having chosen them.
Because in today’s era of technology and infinite choice, it is the wirehouse who needs you and not vice versa. If not for inertia and nine year contracts, why, they’d have almost nothing left at all.
You’re worth it, make them pay.
My complete thoughts about the industry, how it came to be and where it’s headed can be found in my book below:
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.