16 January 2018

Brokerages Restructure, More Power Back In Hands Of Brokers

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Big brokerages like UBS and Merrill Lynch are grappling with regulatory costs and fighting off the rise of independent registered investment advisers who continue to take market share from them.

Some of the U.S.’s biggest brokerage firms, overseeing trillions of dollars in assets, are rejiggering their structures to shift more power to brokers and the managers closest to them in an effort to increase revenue and assets.

The new executive teams running Bank of America Corp.’s BAC -0.38% Merrill Lynch and the U.S. wealth-management arm of UBS Group AG exemplify this new strategy, coming as the two big brokerages grapple with regulatory costs and fight off the rise of independent registered investment advisers who continue to take market share from them.

“The whole wealth-management industry is at a crossroads,” said Alois Pirker, an analyst at Boston-based consultant Aite Group. “Brokerages are seeing that the [registered investment adviser] model is successful because they are in small units and can direct their resources better.”

Merrill said this past week that it would restructure the brokerage’s leadership around six divisions covering the U.S., down from 10, moving some executives to new positions focused on boosting broker productivity and training, while others retired or await yet-to-be-named roles. Merrill head Andy Sieg told brokers the goal is to make Merrill “feel like a smaller, more tightly integrated firm.”

UBS undertook a similar effort last summer. It reorganized its broker regions, eliminated a layer of managers and boosted the number of branches, while also giving managers of those branches greater control over day-to-day decisions involving clients and growth. Tom Naratil, president of UBS’s U.S. arm, said the idea was to “move decision-making and resources closer to clients.”

Automated investment services are also coming online at both brokerages, with Merrill launching a robo adviser earlier this year as UBS is in the process of testing its own. Geared toward a younger group of clients known as mass-affluent investors, the firms’ digital services are expected to free brokers up to focus more on their richer and more profitable clients.

Executives at both firms want to give their brokers more time and autonomy to collect assets, abandoning a model that consolidated power in the firms’ headquarters and stripped local managers of their powers. That means giving field managers, executives responsible for corralling brokers, enough freedom to make decisions tailored to their regions and without senior leadership signing off—a power many local managers had held years before the financial crisis.

At UBS, for example, branch managers now say they have greater rein over client pricing and marketing. Merrill’s changes haven’t fully taken shape yet, but people familiar with the restructuring say market executives will have a bigger say in how to build their branches, through both recruiting new brokers and their clients and helping current Merrill brokers attract new assets.

The shifting approach is expected to do more than just boost asset gathering. Firms hope it helps stem a tide of brokers who had left in the wake of the financial crisis as brokerages’ upper management imposed restrictions on their activities. Brokers who dislike their branch manager or find them unhelpful are more likely to ditch the firm, recruiters say, adding that managers who focus more on training or supporting brokers tend to better retain staff.

The changes come at a crucial time for the big brokerages. Merrill’s revenue has fallen over the past two years, as lower fees and commissions tied to volatile markets, as well as broker departures, have weighed. UBS’s operating income in its U.S. wealth unit had been relatively flat from 2014 to 2015 before increasing 3% last year, a bump-up that came during the restructuring.

Meanwhile, the ranks of independent financial advisers have been growing as much as three times the rate of the big, traditional brokerages, a once rare occurrence in the years preceding the financial crisis, experts say.

Independent advisers have been closing in on traditional brokerages’ supremacy since 2011, when they controlled about 36% of retail assets, compared with brokerages’ nearly 64% share of the market, according to research firm Cerulli Associates. At the end of 2015, independent advisers oversaw nearly 41% of retail assets, while traditional firms’ share slipped to about 59%. By 2020, Cerulli projects that independent brokerages will hold more assets than the traditional firms.

“Brokerages realize the wind is changing,” Mr. Pirker said. “The amount of change within these organizations is reflective of the pressure.”

Click here for the original article from Wall Street Journal. 

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