UHNW Institute

The Evolving World Of Broker-Dealer Platforms

Bill Woodson July 15, 2019


In this latest exclusive commentary from the UHNW Institute, author Bill Woodson considers what is happening in the broker-dealer space.

The following article is by prominent wealth management industry figure Bill Woodson, who is a founder and advisory board member of the UHNW Institute, an organization with which Family Wealth Report is the exclusive media partner. Woodson has produced a number of white papers on issues affecting ultra-high net worth clients and the broader industry. (There is more about the author below this article.)

For more about the Institute, see this link here.

In our ongoing efforts to inform and educate UHNW and family office investors, the UHNW Institute is pleased to provide the following article as the second part of a five-part series on wealth management business models (see The Skinny on Wealth Management Industry Models by Jamie McLaughlin). The goal of these articles is to review the four main industry platforms through which UHNW and family office investors receive wealth management advice and services (broker-dealers, commercial banks, independent registered investment advisors (RIAs), and trust companies). In so doing, we hope to help UHNW and family office investors better understand the industry so that they can make more informed decisions about which industry platforms, firms and advisors are best suited to meet their needs.

The following article reviews those firms that broadly fall under the industry platform category of “broker-dealers” (or brokerage firms). Future articles in this series will review commercial banks, independent RIAs, and trust companies separately. The discussion that follows presents important characteristics of firms within the brokerage industry due to, among other things, the heritage of their businesses, how they approach delivering investment advice, advisor compensation, and potential conflicts of interests.   

It is important to note that the views expressed herein should be considered broad generalizations about the brokerage industry. The reasons for this, as reviewed in more detail below, are that many of the firms that provide investment advice to UHNW and family office investors have evolved their offerings to include products and services that span multiple platforms and include brokerage, banking, investment advisory, and trust.  

For purposes of this article, “broker-dealers” refers to the traditional full-service brokerage firms that provide brokerage services (the buying and selling of securities), research, investment advisory (asset allocation, portfolio construction, manager search and selection, reporting), asset management (through both internal and external managers), and related financial planning advice (retirement, estate planning, wealth education, philanthropy, etc.). Many of these firms also provide insurance and annuity products.  
Generally, they include the following types of firms (1):

•    Large “wire houses” such as Merrill Lynch, Morgan Stanley, Goldman Sachs, and UBS;
•    Discount brokerage firm such as Schwab and Fidelity that are increasingly providing investment advisory and financial planning advice to UHNW investors;
•    Brokerage divisions within the large retail banks such as JP Morgan, Wells Fargo, and Citibank; and 
•    Regional brokerage firms such as Raymond James (including Alex. Brown), Stifel, and Edward Jones. 

As an industry, these firms comprise the largest share of client assets within the broader wealth management industry (excluding insurance brokers and independent broker-dealers who principally serve institutions as opposed to private clients), with approximately 175,000 financial advisors and $16.1 trillion in client assets (out of $20.8 trillion) (2).  
Key considerations as they pertain to the brokerage industry/platform to be discussed include:

•    What are their cultural norms?
•    What are their investment and non-investment processes, service platforms and resources?
•    How do they price their services?
•    What are their regulatory roles/responsibilities and potential conflicts of interest?

What are their cultural norms?
Traditional brokerage firms (as defined above) grew up providing securities research, sales and trading to individual and institutional investors and, over the years, have expanded their role with UHNW and family office investors to include investment advisory and financial planning. As a result of their heritage, brand, and product/advisory offerings, there is typically an investment “primacy” in the relationship they have with clients relative to some of the other industry platforms. For example, advisors at brokerage firms tend to be almost exclusively investment professionals who are responsible for delivering investment advice directly to clients as opposed to “relationship managers” who coordinate the delivery of this advice via other investment specialists.  

This is not to suggest that the client representatives who work at firms included in the other platforms are not investment specialists. Rather, it is the primacy of this role by the advisors that, on average, distinguishes broker-dealers from firms associated with other platforms. For general comparison purposes, client advisors at commercial banks and trust companies are often wealth management generalists whose job it is to manage relationships and bring in investment specialists to address investment needs by UHNW and family office clients.  

Compared with commercial banks or trust companies, brokerage firms have an understanding and acceptance that their clients are often more closely tied to their advisors than to the firm.  While this is often also the case with advisors at independent RIAs, it is not the norm at commercial banks and trust companies. Much of this has to do with the nature of the relationship advisors at brokerage firms have with their clients and the primacy of the investment advice/service they are providing to UHNW and family office investors.  
Commercial banks and trust companies, more commonly than brokerage firms and independent RIAs, provide products tied to the institution itself such as lending, deposits, custody and fiduciary services. Brokerage firms, in contrast, are principally providing securities trading and investment advice where the value is more heavily influenced by the individual providing it as opposed to the institution and its inherent capabilities. While this is, of course, not always the case - indeed commercial banks and trust companies also provide important and valuable trading and investment advice to UHNW and family office investors - it is the relative contribution of the “advisor” versus the “platform” that distinguishes brokerage firms from commercial banks and trust companies.  

As a consequence of the independence advisors at brokerage firms enjoy with respect to their clients, there is a greater disparity in the nature of the advice and services they provide to their clients than, for the most part, at commercial banks, independent RIAs and trust companies.  For example, some advisors might be more transactional in nature than broad-based investment advisory. This is often driven by their interests and skill-set as well as the types of clients they attract.  

Brokerage firms (based in the US) are also unique relative to the other platforms such as commercial banks, independent RIAs and trust companies in that, by-and-large, their advisors are paid based on a percentage of the revenue they generate from clients as opposed to via salary and bonus. This compensation structure changes greatly the relationship between the firm and its advisors and is one of the reasons for the unique firm/advisor dynamics described previously where the advisors often “own” the clients as opposed to the “firm.” Under this compensation structure, brokerage firms have more limited financial-managerial influence over their advisors than commercial banks, independent RIAs and trust companies. This has both advantages and disadvantages, as it increases linearly the direct financial incentive for advisors to generate revenue from clients. 

What are their investment and non-investment processes, service platforms and resources?
There has been a significant evolution in the broader wealth management industry over the past many decades and the historic business models of brokerage, banking, trust and independent investment advisory have merged considerably (see the recent article on the “History of Wealth Management” by Jamie McLaughlin and Robert Casey). Many firms across all four of these major industry platforms can and do provide all or most of these services directly or indirectly including brokerage (research, trading and execution), investment advisory (asset allocation, portfolio construction, and financial planning), trust (fiduciary services), and banking (deposits, lending and custody).  

Furthermore, dual registration (broker-dealer/registered investment advisor) allows for firms and advisors to be both “brokers” and “advisors” held to different standards based on the business they conduct across clients (or with the same client). As a result, broad and clear distinctions between the services each of the firms/advisors provide based on the industry they fall into (commercial bank, brokerage firm, independent RIA, or trust company) have, for many firms, become blurred or dissipated entirely.

As would be expected given the primacy of the investment relationship with clients, brokerage firms have significant investment resources available to UHNW and family office clients, particularly in the areas of research, stock trading and execution, asset management via both internal and third-party managers, and alternative investments. They have also made significant investments in technology to allow investors to trade electronically, conduct their research and receive reporting and portfolio analytics (as have all of the larger wealth management firms that provide investment advice and services for private clients). 

Many brokerage firms (and select commercial banks and trust companies) also invest a great deal in developing their own internal or exclusively-partnered investment strategies that they market to UHNW and family office clients. These include internal asset management solutions, structured notes for capital markets trading strategies, and distribution arrangements (i.e. selling agreements) with third-party investment firms such as private equity.  

Finally, as the role of investment advisor has shifted to providing more holistic wealth management, brokerage firms have also made significant investments in providing financial, estate, tax, philanthropic, and wealth education planning and advice to clients often for no incremental fee. The relevance and importance of these broader planning services have made them ubiquitous across most of the larger wealth management firms regardless of industry platform.  

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