> NEW YORK (MarketWatch) — Big brokerages see higher profits in getting their advisers to focus on wealthier clients and to shed those with investable assets of less than around $250,000. But, by neglecting younger middle-class clients now, the so-called wirehouses risk losing out on the next generation of rich investors.
The current strategy is simple: Clients with more money produce more revenue, and there’s no guarantee that someone with only a couple of hundred thousand dollars now will become a millionaire in the future. So major brokerages have pushed advisers to “fire” this type of client, and the result has been a generally wealthier — but older — client base. Women now top men in valuing a high-paying career
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This threatens to curb growth in the future, according to recent research from Cerulli Associates. “While that’s a good short-term strategy, longer-term they’re going to have to start thinking about how to appeal to the next generation of wealth,” says Cerulli’s Katharine Wolf. Young investors often start out with a deposit account and then accumulate wealth in an employer-sponsored plan like a 401(k), Wolf notes. If they feel the need for more saving and investing, they may start doing so at Vanguard Group, Fidelity Investments or Charles Schwab Corp. , brokerages willing to work with smaller investors, she says. These businesses are beefing up their advisory services, and they may be able to retain investors who would traditionally head to a wirehouse for full-service advice as they grow wealthier, Wolf adds. Chris J. Brown, principal of research firm Hearts & Wallets LLC, says that if young investors develop a strong relationship with a discount brokerage or registered investment adviser, “it will be really hard to take that away when they have substantial assets.” Bank of America Corp.’s Merrill Lynch has been among the big firms pushing its full-service advisers to unload less-wealthy clients. But it also may have a leg up on competitors through Merrill Edge, a division designed for mass-affluent customers, usually with between $50,000 and $250,000 in investable assets. Merrill Edge provides access to investment guidance in-person at banking centers or through a call center as well as an online self-directed investing platform. More Americans keep valuables in safes at home
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Dean Athanasia, a Bank of America preferred and small business banking executive, says the other wirehouses haven’t developed as comprehensive an offering for the mass-affluent. Merrill Edge “introduces a whole new different demographic to our products, solutions guidance and advice and capabilities,” he says. Aite Group research director, Alois Pirker, says familiarizing Generation X and Y clients with Merrill’s brand through Merrill Edge gives the firm a good chance of holding on to those clients as they grow wealthier and move into the full-service advisory bracket. Wells Fargo & Co. , which runs wirehouse Wells Fargo Advisors, also has an online trading platform, WellsTrade. That makes it and Merrill the only wirehouses with “concise strategies” to address the mass-affluent, according to Pirker. But he terms Merrill Edge as “more modern.” Chip Walker, director of financial adviser productivity and retention at Wells Fargo Advisors, says the firm encourages its advisers to understand the relationships in their books of business and be aware that just because clients don’t have significant assets today doesn’t mean they aren’t tied to someone who does. In addition, Walker touts the firm’s multiple channels, including WellsTrade and its Client Solutions Team, with more than 300 advisers who work with mass-affluent clients over the phone. If a full-service adviser doesn’t have enough time for a smaller account but doesn’t want to abandon it, the adviser can refer it to the Client Solutions Team, Walker says. “As they grow their assets, there’s always the potential that relationship will go back to the [financial adviser] who put it with the Client Solutions Team in the first place,” he adds. The other wirehouses, which are Morgan Stanley Smith Barney and UBS Wealth Management Americas, “need to take this topic very seriously and have a strategy ready in how to connect with a younger generation,” Pirker says. “If they don’t, they might miss out on a lot of the wealth that gets inherited.” Morgan Stanley Smith Barney, a joint venture between Morgan Stanley and Citigroup Inc. , takes umbrage at the assertion that it ignores the emerging-affluent market. The firm’s financial advisers “are highly entrepreneurial, and many have business models and team structures that target younger, more mass-affluent clients,” a Morgan Stanley Smith Barney spokeswoman said in a statement. UBS Wealth Management Americas, a unit of UBS AG , declined to comment. Cerulli’s Wolf, meanwhile, says assuming wealthy clients’ heirs will stick with the firm isn’t guaranteed. Some children don’t want to automatically use their parents’ adviser, they “want to make their own choice,” Wolf says. Caitlin Nish "emphasis"> is a reporter with Dow Jones Newswires, where this column originally appeared.
Outside the Box: Shunning young investors could hurt brokerages
