blog

What Does the Morgan Stanley and Smith Barney Merger Mean for Asset Managers and Insurance Companies?

by Steven

The Morgan Stanley/Smith Barney ("MSSB") merger will mean less wholesaler impact in the large banks (the former wirehouses) relative to the increased role of National Accounts and a further migration of financial advisors to the Independent Broker/Dealer and RIA channels.

The new combination continues the consolidation of power among a few of the largest banks: MSSB, Merrill/BofA and Wells Fargo/Wachovia. This consolidation only furthers the importance of the research analysts in the product selection process. The banks are hoping for an increase in pretax margins (MSSB is hoping for a pretax profit margin of 26.2%, up from 18.8%). This kind of profit increase can only happen through further reliance on process, rather than risking advisors picking less profitable and underperforming investments for their clients. National Accounts departments at the product manufacturers will become more important, due to the banks channeling more assets through packaged products and select lists.

Surprisingly, one of our recent surveys showed that only 30% of firms are expanding their National Accounts teams, while 40% are planning to increase their wholesaling force. If the average cost of an external wholesaler is $372,000, while the average cost of someone in National Accounts is $250,000, the math is clear: firms should reallocate their resources to their National Accounts teams.

Not all advisors will be satisfied with the proposed retention bonuses and many will migrate to independent firms, such as LPL and Raymond James, or create their own RIA firm. Product manufacturers that recognize this trend will create a dedicated RIA sales force, as well as reallocate some of their wirehouse-focused wholesalers to the independent channel.

There are 7,000 mutual funds and three big banks. Who do you think will benefit from these mergers? Most likely, it will be the big banks. Only the product manufacturers that adapt will be able to sell their products successfully.