In Practice November 14, 2008

Once a Wirehouse Adviser, Always a Wirehouse Adviser?

Wirehouse advisers seem to like the idea of going independent—but few actually do it.
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Data from Cerulli Associates show clear differences between what channel wirehouse advisers prefer versus where they actually end up after moving firms.

Wirehouse advisers say they would prefer going to an independent broker/dealer (33%) or becoming a dually registered adviser (32%) if they left the wirehouse. However, 44.2% of them go back to another wirehouse when leaving a wirehouse firm. About 23% of them do go to a an independent B/D, but few (3.5%) become dually registered. Other preferred and actual destinations are more in line: 11% prefer a regional channel and 17.2% end up there; about 5% prefer the bank channel and 7% end up there; no one prefers the insurance channel, but about 5% end up there.

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According to Cerulli, the major factors contributing to advisers remaining in the wirehouse channel are remuneration, support, and responsibility. For instance, as far as remuneration, advisers might feel tied to a wirehouse through a long-term stock option program. Advisers might also want to stay with a wirehouse for the credibility and stability.

With that said, Cerulli notes that the headlines of 2008 might have degraded the branding of some of these firms, and also made advisers question the stability of the traditional firms. The financial crisis could end up being a catalyst for advisers who want to go independent (see Competition for Advisers Heats Up, RIAs Don’t Regret Going Independent).

“A major obstacle for advisers going independent is the challenges they face when transitioning from being employee to a business owner,” said Scott Smith, senior analyst at Cerulli and co-author of the report, in a Cerulli release. “To minimize this challenge, both independent B/Ds and RIA service agents have set up extensive transition teams specializing in setting up newly independent practices. These teams have noted sharp up ticks in inquiries through 2008 despite turbulent markets.”

Smith also noted that traditional B/Ds are increasingly recognizing the yearning toward independence and are and creating more independent affiliation models to meet the preference of advisers.

The above findings are from Cerulli Quantitative Update: Advisor Metrics 2008.

Data & Research November 13, 2008

Study Links More Choice with More Risk

Research indicates that too many investment choices in a 401(k) plan may lead participants who are inexperienced investors to take on more risk than they would with fewer options.
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A Rutgers School of Business, University of Texas-Austin, and University of Pittsburgh study found that many employees without extensive investment knowledge will choose a heavier concentration of stocks in their portfolio when confronted with more fund options. A large fund menu more than doubled investment in stocks among those less knowledgeable, from 29% to 60%, and decreased bond fund allocation from 46% to 26%.

More investment options had no significant effect on people who said they had investing knowledge, according to a New York Daily News report about the study.

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The Setup

The researchers asked 211 adults to select an asset allocation when given a choice between either three or 21 mutual funds. Those given the small investment menu were offered a single fund in the three asset classes: one stock fund, one bond fund, and one money market fund. The subjects presented with a large investment menu were offered seven funds in each asset class. The fund descriptions were based on actual funds available at Vanguard, but the brand identifying information was removed.

Those who described themselves as less knowledgeable investors allocated more resources to stock funds and fewer to bond funds when presented with more options than those who described themselves as more knowledgeable. The money allocated to money market funds was not different for either group.

The researchers said what they call the “menu effect” may be causing inexperienced investors to take on more risk than they are comfortable with or than they meant to, without being aware of it.

“Investors should be aware of the potential for the investment plan structure to sway their decisions,’ said Maureen Morrin, an associate professor of marketing at the Rutgers School of Business and a coauthor of the study, according to a press release. “They should have an idea of what type of balance among stocks, bonds and cash is appropriate before they look at a plan, so that the plan is less likely to influence their final allocation decisions.’

The research study, “Saving for Retirement: The Effects of Fund Assortment Size and Investor Knowledge on Asset Allocation Strategies,’ appeared in the Journal of Consumer Affairs. More information about the study is available here.

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