What is the outlook for the US wealth management market?
While all signs point to a steadily growing market, the changes brought on by AI acceleration and technological advancements are stark - traditional firms have begun the battle of facetime vs screen time, and robo-advisors stealthily climb the ranks of asset management. But what does this all mean for the future of the US wealth management market?
The current state of wealth management in the US
The wealth management market is split into a few distinct areas. The first is the wirehouses, with the likes of Merrill Lynch, Morgan Stanley, UBS and Wells Fargo boasting a total financial advisor (FA) headcount of more than 50,000.
However, the financial advisory market is facing a talent crisis. The blame for this pointed at an aging workforce and breakaway advisors.
The next category is regional firms, featuring names such as Raymond James, the Royal Bank of Canada, Stifel. Then there’s the growing independent sector along with boutique firms such as J.P. Morgan Securities, Alex. Brown, First Republic and Rockefeller.
What changes have we seen in recent years?
This landscape is vastly different to the pre-global financial crisis years, when there were more wirehouses and more advisors with fewer qualifications. The GFC led to new regulations put in place to improve investor protection and ensure standardization of advisor qualification. In fact, the entire financial system in the US was put under the microscope after the GFC, with the Dodd-Frank Act introduced in 2010 to put new guardrails in place around the banking sector.
The exodus away from the wirehouses to smaller regional firms, boutiques and independents has been ongoing over the past seven or so years. We’re increasingly seeing advisors seek out more autonomy and less restriction in their work, shunning the regulations and interference of big wirehouses and banks to gain more empowerment, freedom and flexibility in these smaller organizations. Many advisors feel like they’re just a number at a big firm – some of which boast advisor headcounts of more than 15,000.
And while these huge firms have the big name, money and history attached to them, they can be dragged down by draconian decisions, restrictive management and one-size-fits-all policies. The appeal of smaller firms lies in the culture of empowerment. Financial advisors who work for boutique and regional firms tell us their work is more streamlined and they can have a bigger impact, with more autonomy and influence and the potential for higher payouts. Similarly, smaller wealth management companies might be able to offer a more forward-thinking, disruptive strategy.
However, smaller firms cannot necessarily compete in all areas. Simply put, the wirehouse firms are steeped in history and tradition and have a more recognizable brand. They have many more locations and are often a more structured environment. A few of the wirehouses boast about their non-FA businesses and specifically investment banking and Capital Markets expertise. Some advisors just feel more comfortable at wirehouses, though this number seems fewer every day.
Obviously, we can’t talk about recent changes without talking about the pandemic. According to Deloitte, many of the trends we typically see in the US wealth management market have either accelerated - such as the adoption of digital channels - or fallen by the wayside, and there’s still a question over both the short and long-term impacts of COVID. Uncertainty remains, firms have pivoted (and still are pivoting) as quickly as they are able to and the way people work together has completely changed.
What are the challenges facing wealth management?
We’ve seen the Broker Protocol play a key role in the wealth management market previously, with major firms such as UBS and Morgan Stanley breaking away from the industry agreement in 2017.
Established to allow brokers to move between firms and take their clients with them, the protocol was started with just four large wealth management firms in 2004. By 2018, nearly 1,700 firms endorsed the protocol, but that all changed with the departure of the two big players. The move was expected to slow down advisors moving between firms, discouraging them from doing so thanks to the ban on taking their client lists with them, and while we have seen Morgan Stanley, UBS and Merrill Lynch slow down their advisor recruiting in the last 12-18 months, this has been complemented by smaller firms such as Raymond James and First Republic filling the void and hiring high numbers of advisors. In fact, the decision to leave the protocol has had little effect on the wider wealth management industry, and rumors abound the Merrill Lynch may be next to abandon the protocol.
When the protocol was established in 2004, it was also near impossible for brokers or clients to find each other outside of work, with platforms such as Facebook and LinkedIn only just launching around that time. In 2022, that landscape looks a lot different.
Despite the move away from familiar protocol and the “breakaway brokers” looking to avert a crisis, the wirehouse advisor channel is actually growing - it went from $8 trillion in 2018 to over $12 trillion in 2020. With that in mind, one thing is clear - you can’t simply dismiss the power of the wirehouses.
Which candidates are most in demand?
A good financial advisor with a good book of business will be snapped up by almost any firm, be that wirehouse or boutique. However, it’s the book of business that will be most scrutinized. Is it portable? Is it fee-based or transactional?
Those with the best books tend to be the ones who get the best offers. In the wake of the pandemic, it’s very much a candidate-driven market right now, with pressure on big firms, in particular, to stop their senior teams from making career moves into other firms.
Experienced, high-earning advisors control the market; they’re commission-based, bring their own teams with them and dictate where they go next. If they are not being looked after at their current firm, they will look elsewhere – although this decision to move is highly considered and treated extremely seriously.
The aging US workforce, particularly executive wealth management, is creating new pressures for employers and demand for the right advisors. The average age of a financial advisor in the US is 55, with one-fifth aged 65 or older.
We need more young advisors, but is the market ready for them? Are firms prepared to invest in and train younger advisors, and are advisors who are just starting out prepared for the recent changes to advisor compensation schemes that may make it harder for them to make money?
Not only that, but there's also increasing pressure to make the market more inclusive. As more evidence flies in, supporting the notion that women are fueling the growth of the wealth management market, it's clear that companies that fail to diversify their teams will fall behind.
How is technology impacting the US wealth management market?
Online brokers and robo-advisors are disrupting the wealth management industry. It’s been predicted that by 2025, $16 trillion in assets will be managed by robo-advisory services, which means there is more pressure on financial advisors to differentiate themselves. Technology continues to evolve, AI gets smarter and more processes are being automated – so why should clients continue to use human advisors?
The answer to this lies in adoption and adaptation. Advisors who choose to work with technology, rather than against it, will be the ones who thrive in the future. We’re seeing more than half of independent advisory firms planning to invest in new technology in a bid to serve more clients and capture more of the market, with increasingly sophisticated and accessible software used to enhance the service offering provided to clients.
The human, face-to-face element of wealth management cannot be replaced by technology, but it can be augmented and enhanced with programmes that allow for new, different and more direct methods of communication and advice. Those advisors who refuse to embrace technology may find themselves with diminished client pools in the future.
Hanover’s strategy for US wealth management into the future
At Hanover, we are disrupting the US wealth management executive search market. Our two senior partners heading up this team have over 40 years’ experience in the US wealth management market and know the industry inside out.
We believe the service proposition most recruiters offer financial advisors is - quite frankly - poor.
That’s why we take a service-based approach to the market, actively communicating with passive candidates on a regular basis. We frequently meet with advisors, most of whom are not actively thinking of making a career move. We foster these relationships and keep in touch so that when the time is right, we are on hand to help.
Our national coverage and willingness to travel to meet people sets us apart, with a team of more than a dozen extremely experienced wealth management recruiters across the US. We’re proactive and targeted, going above and beyond to ensure we get in front of the market’s best and most employable financial advisors.
Reach out to Hanover US
If you have an interest in wealth management executive search and the services we can offer you, don't hesitate to get in touch. Our team of consultants are on hand to support you, whatever your need. Let us be your agents and help you through the quagmire that is moving within the wealth management market. Contact us here to find out more.