Attrition and breakaways have shrunk head counts at wirehouses

When Morgan Stanley bought Smith Barney from Citigroup Inc. in 2009, it created the largest brokerage force in the industry with more than 20,000 of what the company referred to in a press release as “high-quality” financial advisers. The long-term target, the firm said at the time, was to maintain a workforce of between 18,500 and 19,000 advisers. But in six years, that number has steadily dropped, leaving the firm with about three-quarters of those advisers, or 15,915 as of March 31. While Morgan Stanley may be an extreme example, the wirehouses, which include Wells Fargo Advisors, Bank of America Merrill Lynch, and UBS Wealth Management Americas, have seen aggregate head count slip to 52,215 advisers as of the beginning of this year. That represents an 11% decline from 58,905 in the first quarter of 2009 following the Wachovia, Merrill Lynch and Smith Barney mergers, according to a review of company filings. Although the rate of attrition is slowing, the most recent quarterly reports show that head count at the “Big Four,” aside from Bank of America Merrill Lynch, continues to tick down slightly at a rate of 1% to 3% a year.

Source: 1Q 2015 quarterly earning statements

While the erosion can be attributed to factors as varied as breakaways and reti-rees, the dwindling head count presents one of the biggest threats to the wirehouses as they look to keep pace with the growing ranks of millionaires, according to John Thiel, who oversees Merrill Lynch's roughly 14,200 brokers.

“The wirehouses can't train a $1 billion team.”— Scott Smith,  analyst at Cerulli

“The point today that is so critical is that the addressable wealth in the $1 million-plus segment is growing in every region in this country at about 8%,” he said. “Would Apple have fewer stores if its addressable market was growing? Our store is an adviser, so how are we going to gain market share with fewer people?” At the same time, advisers' capacity to build assets and boost productivity is shrinking as new standards of customer care will likely require advisers to spend more time on existing accounts, Mr. Thiel said. “An adviser — especially as we talk about a consistent, higher standard [of advice] — reaches capacity,” he explained. “There are only so many clients you can reach in this way. You're going to have to have more advisers.” Merrill Lynch's head count had been declining steadily since 2012 from more than 16,000 to just over 13,800 last year. The total recently crossed back over the 14,000 mark after the firm hired more than 1,000 trainees for its practice management development training program. (Related read: Morgan Stanley's big Smith Barney decision)

Reasons for decline

Industry consultants and recruiters said the decline in wirehouse advisers was likely the result of a combination of factors including consolidation, breakaways and an intentional effort to expunge low producers. An aging demographic and increased competition are two of the main factors likely to take a more serious toll on headcount going forward. More than 41% of advisers at the wirehouses are over 55, according to research from Cerulli Associates. “Declining [headcount] is inevitable because there's no way they can replace people with recruiting as quickly as they are leaving,” said Danny Sarch, founder of third-party recruiting firm Leitner Sarch Consultants. “That terrifies firms, as it should.”

Historic lows

Representatives for Wells Fargo, Morgan Stanley and UBS all declined to make officials available to discuss the issue. But a common refrain during quarterly conference calls is that headcount of veteran advisers remains at historic lows. UBS, for example, lost about 2% of its advisers over the past year, reporting 6,982 as of March 31, although company spokesman Gregg Rosenberg called the decline “consistent with our stated strategy of retaining and attracting the top producers in U.S. wealth management and keeping our advisor force at approximately 7,000.”

Source: 1Q 2015 quarterly earning statements

To be sure, wirehouses have increased assets in spite of the decline in adviser headcount. Morgan Stanley, which had $1.4 trillion in assets after it bought Smith Barney, has now crested $2 trillion, as has Merrill Lynch, which had $1.1 trillion in 2009. “They're focusing on the most productive teams and not worrying too much about the overall headcount,” said Scott Smith, an analyst at Cerulli.

Source: 1Q 2015 quarterly earning statements

That outlook, however, will eventually put pressure on firms, he added. “Most of the firms are being forced to focus on recruiting efforts [for veteran advisers] so as not to lose market share,” he said. “It's a slow way to hold on. Building market share is tough through training.” Training is time consuming for firms that are investing in it, and the fact that headcount isn't growing shows that firms have to do more to figure it out, Mr. Smith said. Some firms are looking into hiring career changers while others try to target insurance agents or advisers in regional or banking channels. Incentivizing and forming teams are other ways firms have tried to fight demographic issues.

Some don't survive

Change is slow, however, and even some failed trainees who were unable to make it are likely part of the departures each quarter. “Building market share is tough through training,” Mr. Smith said. “You can't train a $1 billion team.” Still, he said he wouldn't put his money on wirehouse detractors who say the declining headcount is a sign the wirehouse model at its core isn't working. “Everyone is going to try something different and have varying levels of success,” he said. “But wirehouses are dominant and well-funded, and I'm not going to bet against them in this market.”