Investors Lured Away as Brokers Battle to Keep Them (Update1)

By Alexis Leondis

Nov. 17 (Bloomberg) -- Steve Rose, a public relations executive in New York, spent a year weighing whether to keep his money at Morgan Stanley Smith Barney or switch to an independent adviser. Last month he decided to make a move.

“They have a managed portfolio to sell and then it’s sell it and forget it,” said Rose, 56, who had an investment account with the New York-based bank that charged 1 percent of assets and was underperforming the market. “It’s too late to get my business back.”

Full-service brokerage firms such as Bank of America Corp.’s Merrill Lynch, Morgan Stanley Smith Barney and UBS AG are renewing efforts to retain retail clients like Rose and expand their businesses catering to wealthy investors, according to Mercer Bullard, founder of Fund Democracy LLC, an advocacy group in Oxford, Mississippi.

Almost 30 percent of the world’s millionaires withdrew assets or left their wealth management firms last year, and 46 percent lost confidence in their advisers, based on a survey released in June by Capgemini SA and Merrill Lynch & Co.

Independent registered investment advisers are expected to gain about $50 billion in assets this year, in contrast to full- service brokerage firms, whose assets are projected to decline by $189 billion, according to Boston-based consultant Cerulli Associates.

‘New and Sexy’

“The retail side of the brokerage business needs to come up with something new and sexy and that’s why they’re pushing wealth management now,” said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York.

Until brokerage firms move to fee-based compensation entirely, investors will continue to be sold investment products such as annuities, mutual funds or new stock issues, rather than have their wealth managed, Geisst said.

Financial advisers at brokerage firms focus on investment advice, and may be compensated through a combination of commissions and fees. With the emphasis on wealth management, they are targeting customers who have at least $500,000 in investable assets and branching into advice including insurance and estate planning, said Geisst.

Registered investment advisers, who are regulated by the U.S. Securities and Exchange Commission, may offer guidance ranging from tax planning to retirement savings and usually charge a fee based on assets under management. They are required to adhere to a fiduciary duty standard, which means they are supposed to put clients’ best interests first, according to the 1940 Investment Advisers Act.

Adding Advisers

Financial advisers at brokerage firms generally follow a so-called suitability standard, which means they shouldn’t make investment recommendations that are inappropriate, such as products focused on long-term returns for the elderly. Most must register with the SEC and be members of the Financial Industry Regulatory Authority. Some advisers at brokerage firms are dually registered as investment advisers and broker-dealers. President Barack Obama sent legislation to Congress in July that would require brokers recommending investments to meet the fiduciary standard.

New York-based Merrill Lynch recruited 96 advisers last month and Morgan Stanley Smith Barney added 54 advisers, according to Discovery Database, a sales and marketing firm in Shrewsbury, New Jersey. The numbers provided may be not be exact because of reporting delays from data sources, the company said.

Bank of America is bringing in more advisers, and expects asset flows to follow, Sallie Krawcheck, president of the wealth management division, said at a press conference Oct. 5. The bank said last month it was reviving the Merrill Lynch bull logo in a $20 million marketing campaign focusing on its wealth-management business.

Changing Business

The business has “changed dramatically” from transactional to wealth management, said Charles Johnston, president of Morgan Stanley Smith Barney, in a Bloomberg Television interview Oct. 14.

Robert J. McCann, the former Merrill Lynch executive who joined Zurich-based UBS last month as the head of wealth management in the Americas, announced the creation of a new team last week to focus on retaining clients and stemming global net outflows that totaled $25.8 billion in the third quarter.

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