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FRC report: Merrill Lynch, Morgan Stanley, UBS, Wells Fargo are undergoing a radical transformation to a brighter future

Their power to bring institutional-level investing to mass affluent investors could give them the edge though observers have doubts

Author Brooke Southall April 25, 2011 at 2:43 PM
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Robert Martorana: Wirehouses are reinventing their advisor strategies and portfolio construction to gain a bigger slice of the wealth management business.

Stephen Winks

Stephen Winks

April 25, 2011 — 7:22 PM

The wirehouse model model is crippled in several important ways that preclude it from being competivive with the RIA model.
1. The broker has no onging responsibility for recommendations once they are made and executed and the broker is paid precluding the ongoing fiduciary duty of care and loyalty. Structurally the industry is not prepared to support of be accountable for the advice rendered by its brokers as fiduciary liability is triggered and the industry insists that any advice rendered is incidental to trade execution services provided.
2. By focusing on product due dilligence/gate keepers, the industry’s emphasis is on selling investment products or hot performance dots not addressing and managing investment and administrative values on an ongoing basis, on behalf of the consumer in their best interests.
3. The overarching totally customized investment strategy for each individual client is not supported technologically by the brokerage industry so a recommendation can be made in the context of all the client’s holdings, only then is it possible for the industry determine whether a recommendation improved overall portfolio returns, reduced risk or contributed to the tax efficiency, liquidity, cost structure, etc or the clients holding as a whole.
4. Conflicts of interest like treating trade execution as a profit center rather than a cost center precludes brokers from fiduciary standing. Brokers simply disclose conflicts which perpetuates the conflict which will not allow the best interest of the consumer to be served.
5. The brokerage industry has not created a CIO function for brokers which supports the management of an unliited number of investment and administrative values for an unlimiuted number of totally custom client accounts, which requires (a) a structured authenticated audited prudent investment process required for fiduciary standing, (b) advanced technology, (c)overlay management to manage complex values like tax efficiency, trade execution cost, etc, (d) access to real time buy/sell research and an overarching strategy function built around each client’s investment policy and (e) assumption of responsibility for every recommendation made and every client holding monitored.

Investment research gate keeping is a small fraction of the consideration and there is no factual support for middle managers having any influence over the direction of the industry. Leadership must start at the top.

The insular nature of wirehouses does not allow them to presently be responsibe for protecting the best interests of either the broker or the consumer as the needed innovation is necessarily is deemed highly disruptive and too complex to manage. One of the giant b/ds has less than 20 brokers who are allowed to create legitimate investment policy statements essential for fiduciary standing. So, there is a very long way to go.

The retooling of the industry is indeed required, as envisioned by almost everyone who has following regulatory reform—the question is one of vision, leadership and the latitude to execute—which is in short supply. Harvard’s Clayton Christensen (“Innovators Dilemma”) observes, the biggest mistake industry’s face in industry innovation, is to look at innovation in the context of the existing business model when a new business model is in order. Incremental solutions add to complexity, while comprehensive solutions simplify. In order to simplify,the industry must go far above middle management for a solution. So far, top management is not engaged at any of the major firms, there have been no retolling efforts, and without top management engagement RIAs have a massive edge in execution.


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