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Wirehouses have created high-end divisions to compete with the boutiques-but have they succeeded?

By Bill Willis

November 1, 2010

In an effort to compete for the high-net-worth segment of the retail market, Merrill Lynch, Morgan Stanley and UBS have formed separate divisions, which were developed to focus on the challenges unique to this wealthy group. For the most part each firm has been successful. Their distinct high-net-worth units have attracted advisors and the associated clientele from the competition, and each of these divisions has developed the type of specialized support that this group of advisors and clients require.

While each firm seems to have succeeded in dividing its advisor force, there is still a question of what effect this segmentation has had on the firms’ cultures.

For instance, Morgan Stanley Private Wealth Management division has, in a sense, always been a part of the firm. Before the merger with Dean Witter, this group was the small, high-net-worth focused retail arm of a large investment bank.

Advisors were well supported and were often introduced to the firm’s banking clients. They traditionally competed with other boutiques, such as Goldman Sachs, for the wealthiest clients. Having come by way of a merger, its presence seemed natural to the legacy Dean Witter advisors.

Merrill Lynch and UBS each decided to create separate divisions to compete for the much sought after high-net-worth client.

These high-net-worth divisions initially created some confusion internally at the firms. Advisors who were not asked or deemed not qualified to be part of these units would sometimes resent the segmented firms. At both firms the new offices were more opulent and better staffed than the tradition branches, so it was easy to understand the internal ill will these divisions created. It was hard for top producers to accept their exclusion from the new high-end clubs. Status conscious clients felt the effects of segmentation as well. Logically, some would wonder if their account was not important enough to be handled by a high-net-worth office. After hearing the explanations from their advisors, other clients might have speculated that their status was being determined by their advisors’ ranking rather than their own wealth.

I often have heard advisors say that if they could not be considered by a firm’s high-net-worth office, they would have no interest in the firm. The initial problem for clients and advisors was understanding the distinctions and accordingly, where participants were best served.

All in the Branding

Consider the Japanese auto manufacturers, Toyota, Nissan and Honda. Each opened separate divisions to serve a more affluent clientele. Unlike their brokerage brethren, these companies each chose to separately brand their new offerings. While Lexus did not deny that it was owned by Toyota, it worked hard to develop its own unique identity. This distinct branding helped to preserve the culture at Toyota, while building a new one at Lexus.

I do not think that too many Toyota salespeople felt slighted when they were not asked to join Lexus. It was clearly branded as a new firm with a different mission. Furthermore, Acura, Infinity and Lexus presented a clear choice to their potential customers. They offered more luxury at a higher price.

The brokerage firms did not create a unique and separate brand. It was hard to distinguish UBS Financial Services from UBS Private Wealth Management.

In recent years, Merrill, UBS and Morgan have helped its clients and advisors understand the features and differences among its divisions. As each firm has developed a concrete set of guidelines, advisors are clear as to where they and their clients are best served. It’s now understood that the high-net-worth offices have been established to serve clients with $5 million or more in income to invest. For an advisor to qualify, most of the firms insist that the vast majority of one’s book is in that strata and some have even stopped paying these advisors on commissions and fees generated by small accounts. In this environment a small account might be defined as one with less than $2 million in assets.

High-net-worth advisors are typically subject to some unique training and testing before being given their distinction. Now that advisors understand and are accepting of the role of the high-net-worth office, clients are less confused. Clients now know that it is the realm of the $5 million plus account and if their account becomes a candidate, they should be offered choices. The most professional advisors will offer this client those services, perhaps by partnering with an expert in that division.

The high-net-worth experience at the wirehouses is maturing. Advisors and clients now better understand their roles, and as such, the cultural unrest has subsided.

Maturity and Wisdom

We rarely hear complaints from advisors who feel excluded, nor do we find many potential recruits turned off by stratification. After several years of operations, can we call these divisions a success? All have aggressively recruited and been successful bringing on advisors and their clients.

Some wonder if such large organizations can be nimble enough to serve their wealthy clients who often require tailored solutions. Can they be as responsive and creative as the boutiques that have dramatically fewer advisors and boast flat management structure?

I believe these firms can and know they must if they intend to grow the offering over the long term.