The New Wirehouse World

By Janet Levaux

May 01, 2011 at 08:00 PM

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As the financial crisis peaked in 2008, the wirehouse firms found their results and share prices plummeting. A toxic cocktail of bad bets on real-estate assets and collateralized instruments was dragging them down, way down.

To prop up their capital foundations and ensure their operational future, most of them participated in what analysts call "shotgun weddings": Merrill Lynch agreed to be acquired by Bank of America; Wachovia (having recently digested Golden West Financial and A.G. Edwards) was first courted by Citigroup, only to end up partnering with Wells Fargo; and Morgan Stanley grabbed a majority stake in Citi's Smith Barney operations. Only Swiss-owned UBS, embroiled not only in the mortgage mess but also in legal disputes with the IRS, kept its Americas-based advisor force out of an M&A during the crisis.

More than two years later, the wirehouses and their current owners are coming back, along with their stock prices. To be sure, they have a long journey ahead of them — Bank of America, for instance, is trading at around $13 after hitting five-year highs of around $52 and lows of near $3. However, experts say, the latest results show that the wirehouse M&As generally have been positive for the organizations involved, from a financial and organizational viewpoint.

From an advisor's perspective, though, the assessment is more mixed. "If you look at the wirehouses as a game of musical chairs, there are now less chairs in the room," says Bill McGovern, head of the recruiting firm B/D Search, in St. Petersburg, Fla.

Some brokers are feeling trapped by retention deals, while others see their firms' former cultures and service levels disappearing. Many FAs may be taking advantage of new cross-selling opportunities within their organizations to further boost assets, fees and commissions, but at the same time are likely experiencing pressures to expand their business in less than optimal ways.

To assess the pros and cons of the recent wirehouse M&As — and the rumored possibility of a future merger involving UBS-Americas and Wells Fargo — Research spoke with a variety of experts and industry insiders. Their opinions vary widely on which organization has benefitted most (and least) from the shotgun weddings — and on the outlook as integration work continues and the pros and cons shake out.

The New Wirehouse World: BofA-Merrill

Evaluating M&As requires various analytical tools. Really, says Richard Bove, a senior vice president of equity research for Rochdale Securities, it's about "looking beyond what the numbers say for the specific quarters and thinking about whether or not there was a meaningful strategic fit between the two organizations." He asks: "Together, do they generate more than if the two companies had remained separate?"

In Bove's view, the answer to that question for BofA-Merrill is an absolute yes. "There are so many synergies between these two companies that it by far made more sense than the other deals," he explains, and for a number of reasons.

For example, Bank of America was in many ways "a land-locked company in the sense that it didn't have any overseas operations, other than some small operations in London," Bove shares. Merrill had significant operations in Asia, Latin America and Europe. "Thus, the deal expanded Bank of America beyond its historic marketplace" in geographic terms, he adds.

In the U.S., Bank of America had a large number of branches before the merger, but a much small sales force than Merrill when it came to selling financial products. With the deal, "Merrill Lynch brought BofA a huge sales force that could sell products to a more upscale market than BofA traditionally dealt with," the analyst explains. In addition, BofA's strong position in fixed income was not complemented by similar strength in equity markets, currencies and other "esoteric products," according to Bove.

For its part, Merrill had the ability to sell a wide array of products, but it didn't have the array that BofA offered. "Also, BofA's capital dwarfed that of Merrill, which gave Merrill the opportunity to become involved in transactions that it previously couldn't touch, in mergers and acquisitions, in fixed income and other areas across the board," he notes.

And then there's BlackRock, which BofA owned a large stake in when the merger wrapped up on January 1, 2009, but then sold in 2010. "The addition of the asset management business to BofA was a major plus that Merrill brought, but the government largely forced BofA to divest the bulk of its investment in that area" via higher capital requirements, in Bove's view.

Even with the divestment of BlackRock, the BofA-Merrill deal gave both parties strengths that they did not have before, most notably a large potential customer base for Merrill brokers. "It has worked out really well," concludes Bove. "I think that over time Merrill Lynch will become the dominant of the two partners and will have a greater say in where the company is going than Bank of America. This was a coup for the Bank of America, and the best thing that could have had happened at that point in time."

Such influence, which moved from Merrill into BofA-Merrill, is already evident in the institutional and platform operations of the company, says executive-search consultant Mark Elzweig. "And it's still hiring in this area, which is good for the wirehouse side of the equation. In the case of this type of merger, where there was minimal overlap in the two organizations, you get a very strong positive result — including the advisors, who are very content with the leadership of Sallie Krawcheck given her deep roots in the brokerage business," Elzweig explains.

While this deal looks well done at the overall corporate level, though, there's some debate at just how positive it is for Merrill's thundering herd of reps. "I think the bigger issue is how well the firms can integrate," says Bill McGovern, head of the recruiting firm B/D Search. "And Merrill Lynch probably has the advantage, because BofA hasn't tried to dramatically change its culture."

Mindy and Howard Diamond of Diamond Consultants, a recruiter and consultancy that counts Morgan Stanley as a key client, do not share this view, however. "Merrill Lynch is the firm we have been hearing the most negatives about from advisors that we speak with," Howard says. "This was a traditionally pristine, well regarded, crème de la crème wirehouse — so to speak — and in one weekend it became part of a bank. And the wirehouse-bank mentality has not meshed yet."

In other words, the Merrill Lynch brokers are feeling constrained as part of a very large bureaucracy, one that is even bigger than what they experienced pre-merger. "It's becoming a bank-oriented culture," says Mindy, which is very different from the advisor's client-centric, book-of-business focus. "This is not to suggest that banks don't also have this focus, but rather that the two cultures do not always mesh together."

The New Wirehouse World: BofA-Merrill (cont.)

On paper, the BofA-Merrill deal looks very successful. "But the tremendous referrals have not come to pass," Howard indicates. "It was a lot of hype. "This makes it a very attractive place for us to recruit from."

Nonetheless, says Mindy, some Merrill advisors are pleased with the products and services gained through the BofA acquisition. "It's been a real positive for advisors with ultra-high-net-worth clients in need of things like yacht loans, for instance," she explains.
This point, however, doesn't change the Diamonds' overall view that "by and large, the majority of reps feel very negative," according to Mindy. "Were it not for the retention packages, many would have already left."

Recruiter Danny Sarch of Leitner Sarch Consultants, a recruiting firm, is no more sanguine. "Bank of America is very human resource-centric, and that's very different from Merrill. There are edicts that come out of BofA's corporate offices that brokers laugh at — 'Do this or else!' They tell me, 'I've never been threatened so much in a week as I have here,' and it's over little things."
Sarch does give Bank of America credit for doing some things right. For instance, the bank put a tab on Merrill advisors' workstations so the FAs can see what relationships the clients have with BofA. "If your client has a $500,000 mortgage, you can easily see that," he notes.

However, BofA is marketing credit cards, mortgages and other products to Merrill clients, "separately and aggressively," according to Sarch. "This means the broker is seen as the point person in a faceless bureaucracy, though the brokerage business is a high-touch, high-service business. And now Merrill advisors are seen as the entrée to all this stuff."

Advisors are indeed having some success at cross-selling. "But the problem is, once you sell it, you own it — including troubles associated with, say, a client's opening of a certain type of credit account. And the clients will end up blaming or crediting their advisor for all the problems. That has become a real problem," the recruiter explains.

There's also competition for high-end clients between advisors in Merrill's Private Bank Investment Group and those in U.S. Trust. "I hear anecdotally that there are mini-wars over clients as brokers claim to be experts in certain areas, though there also have been pockets of cooperation — when everyone can play in the same sandbox for the good of the client. But [BofA global-wealth head Sallie] Krawcheck may be unwilling or unable to adjudicate these disputes," suggests Sarch.

"At the end of last year, we successfully and quietly completed one of the largest broker dealer integrations in the history of Wall Street," says a Merrill Lynch spokesperson in a statement. "Our competitive position and capabilities have never been stronger, and it shows in our performance numbers." And, as for the issue of over-burdening FAs with products and services, the spokesperson says: "We have more than 800 wealth management banking and credit specialists who partner with our financial advisors across the country — many working within Merrill Lynch Wealth Management branch offices."

When it comes down to the numbers (see chart), the BofA-Merrill merger appears very attractive. "Merrill Lynch has added amazing capabilities to BofA, and it's at a scale that impacts BofA," argues Chip Roame, head of the consultancy Tiburon Strategic Advisors. "And they maintain their superior assets and revenue per advisor" Roame says.

Next page: Wells Fargo

The New Wirehouse World: Wells-Wachovia

Roame is equally upbeat about the merger of Wells Fargo and Wachovia (though he doesn't view either merger as the most successful deal of the past few years). "Wachovia Securities was also absorbed on a stand-alone basis into Wells Fargo, and has continued to do well," he says, noting that it appears to be the only wirehouse to have increased the size of its advisor force organically from 2008 to 2010.

Plus, Wells-Wachovia didn't pay retention packages to its advisors, points out Elzweig. "With the exception of some A.G. Edwards advisors, who didn't want to be caught up in the larger Wachovia organization, the merged company has had relatively few defections," the recruiting consultant says. "To me, that is a vote of confidence."

At the broader level, Wells' purchase of Wachovia "was an excellent merger," Bove states. "It meant the expansion of Wells Fargo's operations to all of the United States and gave it a larger sales force, along with the ability to sell more products, among other things."

Still, the Wachovia deal didn't bring to Wells what Merrill Lynch brought to Bank of America "in terms of the capital markets," the analyst says. Wachovia had a large sales force and customers, however, and this created benefits for Wells Fargo to take advantage of. "Wells Fargo is now a national bank, up there with Bank of America and JP Morgan in terms of deposits, branches and such," he concludes.

Wachovia joined Wells Fargo about five years after it acquired a majority stake of Prudential. With Prudential (2003) and later A.G. Edwards (acquired in 2007), Wachovia had a sales force that was larger "by a difference of magnitude" than anything Wells had in place in 2008, notes Bove.

With all of these acquisitions, though, Wells Fargo has to digest — i.e., integrate. "There are lots of unhappy advisors, and we are talking to many of them," McGovern says. "Remember, a lot of the A.G. Edwards advisors first got rolled up into Wachovia, and now with the second rollup into Wells Fargo, they are now even less happy."

The changes are both cultural and organizational, he explains. "We are talking about a big bank culture, a big push to cross-sell bank products and services, and a good deal of disruption here, too. And these challenging conversions … can be big distractions for brokers and often include changes in branch management," says the Florida-based recruiter and industry veteran.

On the technology front, Wells Fargo says it just wrapped up the conversion of Wells Fargo Investments, WellsTrade and H.D. Vest onto its brokerage technology platform. "The brokerage conversion has gone extremely well," explains David Carroll, head of Wells Fargo's wealth, brokerage and retirement division, in a statement. "By having our brokerage clients on a single operating platform, we can provide a consistent experience and common products and services."

As for the cultural divide between Wells Fargo and Wachovia, this isn't as great as

The New Wirehouse World: Wells-Wachovia (cont.)

that between BofA and Merrill, experts say. "This was also a 'shotgun marriage' as well by and large," says Howard Diamond, whose office is in Chester, N.J. "But there's not as much tension or as many issues. Wells Fargo has been a well-respected name that the Wachovia advisors were glad to get as their brand.

In the Wells-Wachovia merger, there were two banks coming together, rather than a bank and a wirehouse (with BofA-Merrill). "So you were [integrating] two organizations that had a bank mentality," he shares.

This merger also has had some managerial and geographic continuity. While BofA saw Merrill leader Bob McCann depart just after the merger (early 2009), Wells Fargo has kept Wachovia leadership in place: Former Wachovia Securities leader Danny Ludeman is president and CEO of Wells Fargo Advisors, which is part of Wells' wealth brokerage and retirement division. This unit is now led by Carroll, a former executive vice president of Wachovia Corp.

In addition, Wells Fargo Advisors is based in St. Louis, the former home of A.G. Edwards, not in San Francisco, where its parent company is headquartered. "Culturally, Wachovia-Wells does have a very different feel than the other wirehouse firms. So if an advisor is looking to get away from the Wall Street culture and likes a firm with a different feel, this offers them a Midwestern, kinder, gentler, slightly slower kind of place," Mindy Diamond shares. "But it's still a big business."

Plus, it's a complicated one. "What's also ironic to me is that Wells Fargo — prior to the Wachovia deal — had done a very good job of creating a successful brokerage environment on its own," says Sarch. "Now it has to fit in several different channels [of employee, independent and bank advisors, for instance] as part of its rebranding, which is very challenging. And the jury is still out."

The recruiter also believes the cultural and organizational differences should not be minimized. "Yes, Wells and Wachovia are having fewer conflicts than BofA and Merrill, since Wachovia isn't as focused on high net worth as Merrill," he explains. "But I do hear stories that an-ex Wachovia broker will get a mortgage or loan at a certain rate, and then a client will walk into Wells Fargo branch and get a different rate. This means the client goes back to the broker to ask about it."

Wells has also been a very "buttoned down, well-managed organization," he says. Wachovia, for its part, paid very high prices for both A.G. Edwards and Golden West with poor timing. "It arguably made two of the worst acquisitions in the history of the financial services industry," Sarch says. "Thus, at least on the banking side, the Wells Fargo staff must be scratching their heads."

On the brokerage side, the multiple channels seem to be competing with each other for advisors and clients, he describes. "This didn't happen within just Wells Fargo before," says Sarch. "And, remember, these brokers used to be with firms in which people knew their names when they called the home office," he adds, "and now you are a number. It's maybe not 1984, but … culturally, it is different."

Next page: MSSB

The New Wirehouse World: Morgan Stanley-Smith Barney

The final "big deal" to emerge from the recent financial crisis, of course, didn't entail an all-out merger: Morgan Stanley Smith Barney was formed in early 2009, when Citi agreed to sell 51 percent of its retail brokerage operations to Morgan Stanley. "This allowed the Morgan Stanley, primarily Dean Witter still, to radically grow its sales force and assets, and to benefit from higher average assets (per advisors) and revenue," says Roame.

Morgan Stanley's expansion — of its sales force from about 8,000 advisors to 18,000 and its client asset base from about $500 million to $1.7 trillion — was quite a feat, the consultant argues. It also gave Morgan Stanley a boost to its average trailing-12-month production (fees and commissions) and average assets under administration.

"UBS did not really do any M&A [recently], and both Merrill and Wachovia were absorbed without major change. The Merrill and Wachovia deals were bigger than the events in their private client group," Roame points out.

Thus, the consultant believes, Morgan Stanley Smith Barney is the organization that has benefitted the most when viewed from private-client perspective. "Citi was in a tough financial position and got to participate [in this venture], which helped. But Morgan Stanley is the big winner by absorbing Smith Barney, a name that may soon be gone, too," he concludes.

"Morgan Stanley Smith Barney now produces about 40 percent of Morgan Stanley's net revenues and is an important component of CEO James Gorman's diversified, client-driven strategy," says Morgan Stanley Smith Barney president Greg Fleming in a statement. "We've accomplished a lot of integration and are now focused on completing the new technology platform and moving everyone onto it. The business's vital signs are healthy, and we're headed in the right direction."

But while the venture has the biggest sales force (when measured by Series 7, non-bank advisors), "Other than the larger sales force, Morgan Stanley didn't get anything else," Bove argues. "What's so exciting about the Bank of America-Merrill merger is the fact that there are many facets of the two companies that have improved as a result of the deal. And for Wells-Wachovia, some facets have improved."

Yes, size may matter in what, some argue, is becoming a scale-dominated business, Bove admits. "But it doesn't bring new products, geography or other areas of business [to Morgan Stanley Smith Barney]," he asserts. "It's more of a traditional merger, and it's not transformational like the other two deals."

The Diamonds, though they admit they're biased as recruiters for Morgan Stanley,

The New Wirehouse World: Morgan Stanley-Smith Barney (cont.)

believe the benefits of marrying two high-quality firms are significant. "To get away from the bank and into a true wirehouse and brokerage firm was probably seen as a breath of fresh air for many of the [Smith Barney] advisors," says Howard.

Furthermore, there were areas of the wealth-management business in which Morgan Stanley excelled over Smith Barney and vice versa. "They've brought together two best-in-class platforms and are making [the combined platform] better," says Mindy. "Or, put another way, they can keep the best and leave the rest," adds Howard.

To Sarch, however, the merger of two equals presents Morgan Stanley with "the greatest challenge" of all the wirehouse firms involved in recent M&As — since the change is entirely concentrated within the sales force. Yes, scale is advantageous for covering fixed costs and adding profit to cover those costs, explains. "But when you have too many brokers from the same firm in the same market, they get in each other's way!"

In other words, asks Sarch, "How is having 300 brokers in Paramus, N.J., giving you scale? You have such a dominant market share that every time an advisor calls a prospect that person already has a relationship with a Morgan Stanley Smith Barney. Thus, rather than having wonderful scale, you have a lot of crabs in a bucket, crawling all over each other to get out. It's a problem."

In addition to the cannibalization — a challenge not only for Morgan Stanley Smith Barney advisors but for many FAs today within the wirehouse world — there's also the concentration of more advisors within the larger branch system, Sarch explains. After the merger, a branch manager might be covering 200-300 advisors and three or four branches, whereas in the past, the manager would be working at one branch with about 50 FAs.

"The Smith Barney managers, it needs to be said, were empowered to do so much more than the Morgan Stanley managers," the recruiter explains. "That's a tremendous culture change, and it impacts the service model," as does the organizational shift within the branch network.

For the advisor, "There are decisions to be made, and they have a very tough time of getting the attention of the people capable of making these decisions. You've slowed down the sales process and stilted it, while taking away some of your service," notes Sarch. "Ultimately client satisfaction suffers, and you end up losing business."

Next page: UBS

The New Wirehouse World: UBS

While UBS faced plummeting results during the financial crisis and global tax disputes, its wealth-management operations in the Americas have stabilized. Ironically, the needs of the Swiss parent may now push it into a shotgun marriage.

"UBS has tremendous capital needs," says Bove. "The Swiss banking authorities have made the decision that the Basil III requirements are not good enough and that the Swiss banks should be 50 percent more capitalized on a relative basis than other banks in the world."

As a result, UBS must shrink its operations dramatically, raise a lot of capital or do a bit of both, the analyst says. "One source of additional capital could be the sales of UBS [Americas], and we shouldn't discount the effect/possibility that a division of UBS could be sold."

Rumors persist that the suitor could be Wells Fargo. "I'm not sure, given Wells Fargo's current sales force, if it would make sense. At some point, large operations or sales forces become hard to manage. Also, for UBS, there's a need for a sales force to sell its bank products, which would be weakened by such a deal," Bove said. "But regulators are forcing UBS to move toward a sale."

The Wells-UBS deal could even be done as early as this summer, according to Roame (who predicted the BofA-Merrill deal in Research in June 2008). "UBS is undersized now relative to the 'big three.' And UBS is also very attractive as a takeover candidate for Wells Fargo Advisors," he says.

In addition to bringing Wells some 6,000 more advisors, such a deal would boost the average production and assets of its FA force, the consultant notes. "This would let Wells hold more successful advisors as case examples and allow the firm to trim some underperformers," Roame notes.

However, such a deal could create additional disruptions and distractions for advisors in both groups, according to McGovern. For clients of UBS and Wells, too, there would be confusion and probably some less-than-optimal outcomes, he notes. Finally, other experts point out, Wells-Wachovia would be digesting yet another significant merger, which would create serious organizational tensions and challenges that shouldn't be minimized.

According to UBS-Americas, rumors about its potential acquisition are completely unfounded. "UBS Wealth Management Americas is an integral part of the UBS AG business model and it is not for sale," says spokeswoman Karina Byrne.

She notes that in the last quarter of 2010, revenues grew 7 percent from the previous quarter, net new money inflows improved and net new money from same-store advisors was positive for the fourth consecutive quarter. "We are continuing to maintain and build a high-quality FA population.… The attrition of financial advisors [in the fourth quarter of 2010] was at the lowest level since 2006," says Byrne.

The New Wirehouse World: Synergies, Miseries

While further integration work remains to be done within the merged wirehouses, "I'd say these deals have been more beneficial than not," shares Bove. "Really, there's an array of things that now look well done. Whether or not the deals were well thought out or not is a separate issue — in '08, firms were shooting in all directions.

"Overall, what they did was staggeringly successful. Even the Fed has recently revealed that in '08 the U.S. banks didn't need as much capital as they thought they did at the time," the analyst adds. "And now, all the money's been paid back, which is an incredible success story. And the Federal Reserve made a fortune on those credit extensions. And most important, we're not in a depression right now."

On the other hand, argues Sarch, M&As in the financial services industry don't seem to do much for it in the long term. "I believe the future will prove such M&As are a large waste of money. Look at the industry's past disasters — Merrill taking over Advest, or Smith Barney taking over Legg Mason. The success rates and retention when the big firms take over the small ones are embarrassing," the recruiter says.

"Where have these deals worked? American Express tried it and failed. Citicorp tried it and failed. The big deals have proven difficult to manage, and the idea of cross selling, though in theory it sounds wonderful, turns out to be full of all types of traps and surprises," he shares. "It's not this wonderful increase in revenue … There are issues here that have to do with the size and size only — not competency. In other words, this may possibly be an impossible task."

In general, Sarch asserts, small firms end up merging with bigger firms "because they are paid more. It's a shame and may be better for shareholders in the short run, but in long term it is worse for shareholders. Since unhappy staff will leave over time."

From the advisor's perspective, though, the jury is still out, says McGovern: "The real measure will two years from now as we see how the execution and consolidation has gone, and if the reps are OK with the new homes they are working for."

Some advisors, says Mindy Diamond, are telling themselves, "If I can just hold on until 2012," which is when a large trench of the retention package at BofA-Merrill kicks in, for instance. "Then, I may be much more eager to go."

There also are plenty of advisors who have signing bonuses that last as long as eight or nine years, observes McGovern. "And it's going to be a challenge to manage advisor expectations and keep them happy in light of all the changes due to consolidation and integration, along with the feeling they have that they cannot leave. This is close to indentured servitude, and it's the worst kind of mindset…. What does [an advisor] produce when he or she is stuck?"

These and other changes — such as the pushing out of low-producing wirehouse brokers — have helped accelerate growth in other parts of the industry, as advisors have looked for new working environments. Many advisors focus on the change in culture at their wirehouse, says Mindy, "And how it doesn't feel like the firm they used to work for or how sad they are for the losses related to that change in culture."

As a result, Howard points out, advisors know they have fewer options in the traditional brokerage space than two years ago, but they also see a slew of other options. "Over the last two years or so, we've seen the emergence of independents, RIAs, the custodial channel and the breakaway broker phenomena," he says.

In other words, wirehouse advisors have changed their view of going independent 180 degrees. "They were never thinking of this before, when some used to think that going independent meant you 'couldn't cut it' [at the wirehouses]. Now, quite the contrary, those building independent wealth-management firms are seen as superstars."

HighTower, for instance, didn't exist before the Great Recession. "Most advisors, and from our perspective, we, too, believe that advisors have more legitimate options for their wealth management practice today than ever before," Mindy explains. Yes, it's ironic: There are fewer wirehouse players to consider — but as that side has compressed, there are still more legitimate options in the industry — the independents, the boutiques (like Barclays or Baird, Credit Suisse or JPMorgan) and the regional firms — have been major winners," along with the custodial firms.

Not so fast, insists Howard. "News of the death of the wirehouses is greatly exaggerated. Look at their balance sheets, stocks; they are profitable and are making money, selectively recruiting, still attracting assets and they are still appealing to that segment of the population that is only going to be happy if they have their money at a wirehouse," he explains.

Indeed, the latest figures on managed accounts assets, as tracked by Cerulli Associates, show the wirehouse advisors with their hands on more than 55 percent of the industry's $2.2 trillion in assets. The four firms count $1.2-plus trillion in their managed-account programs as of December 2010.

Still, cautions Mindy, "It's surprising that they are on their feet, given how bad things were. But still they are worse for wear. By and large, whatever advisor loyalty there was … is gone — all gone." Yet, there will always be advisors who are most comfortable working in the wirehouse environment, she admits. "But the group of advisors that stays at a wirehouse now does so because it is the easiest and best thing for them to do for themselves. It has nothing to do with loyalty."

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