Firms are Shifting their Business Models, and Advisors Can Exploit this to Grow AUM

Merrill Lynch and Morgan Stanley maybe signaling a new reality for Advisors, but it’s not all bad news!

The move by Merrill Lynch and Morgan Stanley over the last week to change the way they report the number of Advisors on their respective platforms is a shot across the bow, a warning shot to Advisors of what’s to come.

Few have fully understand how consequential this change is for the industry.

We believe that many of the large full service or bank owned firms will soon follow.

In Canada for example, firms like Scotia Wealth, TD Private Wealth and CIBC Wood Gundy have already started to position their platforms for these changes.

But Merrill Lynch is the Role Model for Other Firms

In the case of Merrill Lynch, there’s been a curious silence over the last year, for a large firm, they’ve shown very little interest or strength in their recruiting efforts.

Merrill is traditionally one of the most aggressive in the industry, since the start of the pandemic there’s been a steady departure of Advisors to other platforms. For the 12 months leading up to March 2021, Merrill’s headcount dropped by a staggering 585, what is even more concerning is that 295 of those left in the first quarter of 2021. 🆘

“Merrill is projecting low single-digit growth in the number of its advisors annually over the next five years” - Management

For 2020 Merrill stood at the bottom of the list, that is of approximately 402 Wealth Management firms in the US, when ranked around recruitment.

Approximately $57.7 billion of AUM left the Merrill platform, to find new homes- at independent Regional Firms, RIAs or as breakaway Advisors that ventured out on their own to start new RIAs. As of March 31, 2021 overall headcount is still a whopping 19,808 Advisors, but markedly down from 20,393 in March 2020 (this headcount including Merrill Lynch, Pierce, Fenner & Smith Incorporated and Bank of America Private Banking and Investment Businesses).

But these numbers are being eclipsed by Merrill’s strong performance otherwise. So far this year, Merrill has reported first quarter 2021 Revenues for Wealth Management of $4.2 billion, added 6,400 new households and boasting record client balances of $3.5 Trillion as of March 2021, up 31% year over year. Still an incredible monster business in the industry.

However, just about $15.5 Billion of AUM left the firm in Q1 -2021.

Merrill is a bit of an anomaly, in some ways it still feels like they’ve completely abandoned ship on the Wealth Management. In 2020 they recruited a grand total of 120 rookies, but, eventually these were moved to administration roles within the firm, so zero effort to grow the Wealth Management Advisors headcount - What The F@#% are they thinking?🤯

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Clearly the Pandemic did not prevent recruitment activities at some firms in 2020. What’s evident, is that Advisors were also able to negotiate some serious recruitment bonuses from independent and regional firms, in some case up to 5x their revenues for some of the largest AUM Advisories, when all comps and bonuses are accounted for.


Is a Single Private Banker Recruit a Signal For Change

There’s one peculiar recruitment transaction that is getting some attention, last week Barron’s reported that Merrill had recruited a private banking team away from CITI, managing $17 billion for UHNW and Family Offices.

But let’s just think about this for a second, is $17 billion really $17 billion AUM? Not so sure when it’s Private Banking business. 🙄

Yes, “Private Banker” (PB) and this is where the lines start to blur, some would say that its about Assets and Revenues, and that’s probably right, but, the economic model of “Private Bankers” vs. “Advisors” is quite different.

How different, well Firm’s tend to keep substantially greater portions of revenues generated by “Private Banking Groups” than they would through Advisor generated revenues in Wealth Management. So therefore, it is about efficiencies of Revenue generation after all.

But also the activities of Private Bankers are different from Financial Advisors, and Private Banking assets tend to be far more sticky because there’s more banking and less Advising, i.e. for many family offices a Private Banking relationship involves activities that often fall outside of the scope of Financial Advisors, taking the term holistic to another level.

At most large Banks, the role of a Private Banker centers around expanding the banks various services to the clients, everything from Credit Card Products, various forms of Leverage and Loans (lots of Loans), Hedging strategies and Proprietary Investment Opportunities.

But for Family Offices, they view a Private Banker in a different light, as a conduit to access the Bank’s capital, to assist in executing Family Office sponsored transactions, access to syndicated loan structures that can enable acquisition of Real Estate and Corporate assets, F/X for foreign transactions, or hedging.

Family Offices tend to have their own expertise in house, do their own analysis, have their own idea origination and are therefore less dependent on ideas driven by brokerage research, they tend to structure their own transactions and tend to focus more on private equity transaction and off market transactions or utilize sophisticated bespoke solutions to access public markets.

Much like the Total Return Swaps used by Archegos Capital that ruined it last month for many large prime brokers, and wiped out $5.5 billion off of Credit Suisse balance sheet, well that’s just one example, probably many other structures - highly levered or bespoke credit default swaps and highly customized derivatives etc.

But unlike the typical Advisory Fees or commission earned by Advisors, Private Banker revenue streams vary. Most Private Banker earn a flat annual salary, with further incentives linked to successfully arranging certain loan transactions or bonuses related to newly created transaction structures and volumes.

Unlike AUM fees, the Private Banker do not often earn fees to have cash or investments sitting in a bank account, so it comes down to facilitating transactions for their clients. However, the margins for the firm tends to be much higher for these clients, as transaction origination fees, spread on loans, f/x or hedging transactions can be very lucrative, particularly when these transaction tend to be repeating constantly, the good old churn -🎡.

So while Advisors tend to spend their time around financial planning, trust & estate planning, retirement, 401(k) and asset allocation etc. the private banker is, well a banker. Those Private Bankers in Miami would likely also focus a fair bit on dealing with foreign international family offices, after all Miami is the gateway to Latin American wealth.

Client Ownership Is An Important Differentiator for Advisors

One of the greatest distinction between a Private Banker and a Financial Advisors, is Client Ownership, many would argue that because of the nature of the transactions being facilitated by the Private Banker, the clients are more tied to the organization than the Individual.

$17 Billion is just a BIG HEADLINE 🥱

My point is here is that while the headline around Merrill recruiting a team managing $17 billion for UHNW and Family Offices, might seem like a huge turn around, its likely far from that.

Transitioning this $17 billion will be a momentous task, that will require the Family Offices to unwind the many loan agreements, hedging arrangements, SWAP agreements, collateral agreements etc. that are in place with CITI. Unlikely to happen in the near term, probably the best outcome here is a gradual transition into new arrangements with Bank of America / Merrill Lynch.

Smoke and Mirrors

Merrill has hinted that their recruitment efforts will be directed at Advisors who serve the UHNW, Family Office and HNW and they will concentrate on existing Advisors on the platform rather than a push to recruit outside Advisors.

But the true objective here - is to accelerate integration of Banking and Brokerage businesses. A direction that many Bank Owned firms have been moving to more aggressively.

What’s really at play as well is a gradual transition to centralized management, larger AUM practices and a consolidation of Assets internally - as this approach becomes adopted by more firms.

Advisors should pay attention. Consolidation internally increases the likelihood of gaining access to AUM acquisition opportunities.

Is the writing on the Wall?

Why are Merrill Lynch and Morgan Stanley changing the way they show Advisor headcount? And what’s the impact or Opportunity for Advisors?

The Pandemic has supplied these firms with an excuse to strategic reorganized their business models around Banking & Wealth Management. It’s not all roses for Advisors either, but there’s a great opportunity being lined up for some astute Advisors.

By grouping Wealth Management and Private Banking headcount together, these firms will be able to also focus on consolidating AUM internally. This move will encourage larger AUM practices and teams, the bar is gradually moving higher for those with smaller AUM practices, and eventually these Advisors will have only two options

  1. Grow Quickly to keep up or

  2. Move to a competing platform with better incentives.

Who wins, who’s losing and how do you exploit this see change

For the past decade the transition to RIA channels away from traditional brokerage platforms has been prevalent, and recently this move has accelerated even more.

But full service firms are finally waking up to this and are changing their model to put walls around their largest AUM Advisors.

The Advisors who are mindful of the firm’s intent here are most likely the better equipped to exploit this transition. While much of this trend has been evident at Merrill Lynch, it’s easy to see why other large firms are taking this seriously as well. With an aim to retain as much AUM as possible, we envision firms providing more resources to the larger AUM practices, including

  • more support to consolidate AUM of retiring Advisors and those leaving the industry,

  • lucrative retention incentives to keep Advisors on the platforms

  • greater access to banking, structured products and lending

  • integration of resources to allow Advisors on these platforms to be in a very competitive position

The Opportunity - Acquire AUM to grow fast.


The Chairman’s Council |  Strategy Playbook

💥 What you’ve been missing out on! 💥

Here’s a peek at recent paid subscription content 👇


👉 April 20, 2021

Stop Languishing. Don't Pivot. Grow!

Remote work has put many Advisor in a weakened position, they're no longer able to drive new business growth through traditional means. But - Some have managed to strengthen their Position.

Advisors are onboarding clients that they would not otherwise consider - clients that don’t fit the practice model. This act is leading chaotic non confirming practices, lost of focus and a mix of clients that are not cohesive.

In effect, the Advisors that continue down this path will weaken their profile and lose their edge, their strategic place within the niche that they intended to serve.

The pandemic and remote work environment has put many Advisor in a weakened position, they are no longer able to drive new business growth through traditional means. Challenged by what may seem like limited options, many are choosing a compromise and accepting clients that are not an ideal fit to their core service offering or mission of their business. Why? they are struggling to grow in the current environment and with limited options are forced to accept all that’s available to them.

Alternatively, some Advisors have been re-inventing their delivery mechanisms to continue to serve unique groups with specialized offerings. This small group has been seeing tremendous gains even through the pandemic, they have also managed to strengthen their position, demonstrate discipline and are establishing a favorable reputation amongst their targeted audience.

The Advisor, their Capabilities and their Ideal Clients, continue reading here


👉 April 12, 2021

Pandemic has Altered Investors Mindset - Are you a Group A or Group B Advisor

Some Advisors have false sense of confidence - their traditional growth or marketing methods will be effective again, blind faith might be causing them to view the current environment as temporary 🤯

Since the onset of this pandemic, there’s been an interesting dichotomy in the disposition of Advisors -

  • for one group, the massive move up in Markets have tranquilized their temperament, relinquishing enormous anxiety, and offering a sense of great accomplishment. This windfall for their clients has allowed them the luxury of feeling like they’ve been triumphant in what has otherwise been a burdensome and challenging period - Group 🅰️

  • for others, especially emerging Advisors and some close to retirement, the story has been quite the opposite, while they’ve also benefited from rising markets, they’ve been adversely impacted by their inability to “grow” - Group 🅱️

As you lookout to the vast fields of Advisors, it quickly becomes evident that over the last year a striking majority of Advisors found themselves in the second group.

While there may be a number of different rationale for this, the simple explanation is that Advisors in Group 🅰️ likely have a much larger AUM business and therefore benefited from rising markets, they actually achieved higher Revenues on their business over the pandemic period. In effect, it was an effortless win for these Advisors. 🏆 Its been even more exciting for this group, in some cases they’ve used the pandemic to exploit other lucrative opportunities that massively increased their take home windfall 💲, - more on this later.

The Wrong Mindset for Advisors - “lets just hang tight, wait until the dust settles, a few more months of vaccinations and things will return to normal” continue reading here


👉 April 5, 2021

Creating a Team of Associate Advisors to Drive Growth

The Elite Wealth Advisor Flywheel - Version 2.0

There’s an interesting transition of leadership occurring in our industry as a result of changing demographics in the business. This “changing of the guards” so to speak, creates an unusual arbitrage opportunity that are allowing some entrepreneurial Advisors to create incredibly large AUM businesses without the stress of the traditional growing pains. All while the overall industry continues to be highly obsessed with traditional marketing approaches.

Building in the new world requires some outside of the box thinking, in this edition, we’ll explore a new fascinating team approach that some elite Advisors are pursuing that allows them to grow fast, while maintaining -

  • remarkable client experiences,

  • high quality service levels,

  • noticeably better return on investment in their practice and

  • tremendous flexibility to scale well beyond traditional approaches

Creating a Team of Associate Advisors ⛭

A clear distinction in these practices is that the Lead Advisor operates like a CEO, and hires exceptional Associates and support staff which creates efficiencies and scale that is uncommon in the industry.

While much of this approach is borrowed from RIAs and Private Investment Council firms, it’s also commonly used in other sectors. Traditionally an uncommon approach at most full service firms, perhaps because few Advisors ever grow large enough to organize their practice in this manner.

When analyzed deeper it is evident that the profound compounding effect of this acquisition strategy can be incredibly powerful. Promoting a strong sense of ownership across the Advisory team and targeting decisive growth strategies allows lead Advisors to apply this unique model and drive intense AUM & Revenue growth. continue reading here


AUM Acquisition Opportunities are There - Don’t Be Afraid to Ask

One of our subscribers reached out recently and shared his own experience-

As an Advisor for over 40 years, I’ve never felt more overwhelmed, trying to navigate the complexities of managing my clients and business remotely. Many have relied on me for decades through their own life changing events and varying economic & market cycles. But nothing like we’ve had to endure over the last year.

I never thought that I would be this rather compromising position, but it seems as though I’m not alone, some others within my small circle are facing similar challenges. As many of us approach retirement, the likely next step is to sell our practice to another younger Advisor.

However, on my platform, there’s a strong sense of competition and growth by new client acquisitions, even at my stage, and through the pandemic, younger Advisor see this as a competition to grow, rather than an avenue to collaborate. And I know that many of these younger Advisors have struggled to grow this year.

My practice is strong, I’ve been amongst the top producers in my branch for over 15 years, but that’s primarily because the size of my practice. The truth is that much of the growth has been organic for a long time. I’ve done no marketing for over 10 years, and don’t see myself as competing with anyone.

I’ve never had an Advisor approach me and suggest a partnership, or encourage me to sell them a Carve Out of my AUM, or anyone showing interest in acquiring my practice when I retire. Perhaps some of the younger Advisors are simply intimated to pursue this as a way to grow.

What’s really interesting is that we’re not facing the challenge of uncertain markets to affect the value of our AUM, we’re facing a lack of interested Advisors pursuing AUM Acquisitions to grow.

I’ve been quite intrigued by the persistent call to action by the Chairman’s Council articles, encouraging Advisors to seek out AUM acquisition opportunities as a mode to grow fast. The opportunities are there, there’s an abundance of Advisors in my position that may be seeking an early exit because of the added anxiety of the pandemic.

There are currently three other Advisors in my Branch that are in a similar position, each of us are within a few years from retirement, but would consider partnerships or sale of our practices today. Combined the four of us control some $850 million of AUM.

This has been a topic of discussion within my circle, I’m curious to get your view on how as a group we should approach other Advisors within our branch, i.e. slow wind down by selling multiple carve outs, partnerships, or outright sale of the entire AUM.

While this was timely and interesting, this Advisor’s comments is spot on, we’ve heard of similar situations from others. If you’ve been reading the Chairman’s Council newsletter for some time, AUM Acquisition is perhaps the one topic we’ve covered the most. Yet we continue to question why more Advisors are not pursuing AUM acquisitions as their primary growth strategy, but generally this comes down to the Flywheel of the Firm vs. the Flywheel of the Advisors.(see here and here)

Many firms continue to encourage Advisors to focus their attention and resources on attracting new outside clients. Partnerships, AUM Carve Outs and AUM Acquisitions continue to be a taboo subject and so all of the activities related to these tend to be under the radar, not very widely publicized.

But that’s the opportunity, there’s a huge change happening in our industry that is being driven by shifting demographics and “AUM Acquisition is the most potent growth technique available to Advisors today.”💥


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