Independents Make Headway Despite Downturn

(Dow Jones) A deep recession and market meltdown didn't stop independent registered investment advisors from experiencing growth since 2007-in terms of assets, market share and net-money flows.

And their gains seem to have come at the expense of the national self-clearing brokerages, also known as wirehouses.

While the broad U.S. stock market shed about 18% of its value, the wirehouse channel-consisting of Merrill Lynch, Morgan Stanley (MS), Smith Barney, Wachovia Securities and UBS Wealth Management USA-saw a 17.5% decline in end-client assets, from $5.7 trillion at the end of 2007 to $4.7 trillion at the end of 2009, according to data compiled by Aite Group.

In other words, the wirehouse channel dropped more than $900 billion in end-client assets-even as it added advisors and assets through Wachovia's purchase of A.G. Edwards, and took on legacy brokers through Wells Fargo's (WFC) purchase of Wachovia and Bank of America's (BAC) takeover of Merrill.

Meanwhile, independent RIAs ended 2009 with $1.5 trillion in client assets compared with $1.3 trillion at the end of 2007, a gain of 15.4%, or $200 billion.

With a wealth-management asset pool of about $12.4 trillion in play at the end of 2009, the wirehouses shed 0.9% for a 38% share of the market in a year that saw stocks gain around 27%. RIAs, which grew faster than any other wealth-management channel, added 1.5% in 2009 for a 12% share.

Aite data on new money flows to the wirehouses show that Merrill, Morgan Stanley and Smith Barney lost a total of around $150 billion in 2009, or roughly 3% of their total client assets in 2008. This reflects an exodus of about 10,600 brokers from these firms in 2008 and 2009.

UBS's efforts to pull in top producers from other wirehouses paid off in terms of net new money in the nine months through March 2009, but subsequent advisor attrition resulted in steady net-flow losses for the balance of the year.

RIAs can be seen as the principal beneficiaries from the wirehouse channel's losses in a period characterized by asset-value erosion and cash sidelining. Other net gainers-the big regional and discount brokerages-posted smaller percentage increases. Independent brokerages, meanwhile, lost even more ground than the wirehouses, due in part to integration of big players with self-clearing firms and the conversion of several others-securities platforms at Vanguard and Chase, for example - to self-clearing status.

Dan Seivert, chief executive of the Los Angeles-based investment bank Echelon Partners, cautions against equating one channel's losses to another's gains. While advisors and investors may be shifting assets from firms they see as too closely aligned with Wall Street, it may also be that RIAs have been better organic asset gatherers-particularly with the big slowdown in IPOs, traditionally a strong asset catcher for wirehouse advisors.

Still, net new money flows to RIA custody providers seem to bolster the view that the RIA channel has prospered at the expense of wirehouses.

Fidelity, which says it onboarded a record 191 broker teams to its RIA platform in 2009, has seen "several billion dollars" a year in net new money under management from wirehouse brokers since 2004, according to a spokesman.

Charles Schwab Corp. (SCHW), which runs the biggest RIA-custody business, is more specific about net new money, but hazier on its origins. In 2008 and 2009 its Advisor Services unit took in $101.5 billion in net new assets as its overall assets under management went from $570 billion to about $590 billion.