Nary a day passes without some brokerage firm or another announcing an initiative aimed at attracting wealthy customers. With their new private wealth management groups, more sophisticated money management offerings, alternative investments or “segmentation” strategies, the major Wall Street firms exhibit all the signs of obsession with big-game hunting. Of course, they're chasing a relatively rare breed: the richest 10 percent of the U.S. population, with a median net worth of about $2.1 million, according to the Federal Reserve (assuming half those assets are investable, that's the vaunted million-dollar client).

Obviously, everyone yearns for these trophy clients — that's where the money is. But the dogged nature of the pursuit begs a few questions: Are there enough of them to go around? Are wealthy clients so profitable as to warrant the attention they're garnering lately? And perhaps most importantly, are the major brokerage firms losing interest in the everyday investor who has been the very foundation of many of their successes? Put another way: Is Wall Street abandoning Main Street?

TO UP-MARKET WE GO

It's undeniable that the New York-based wirehouses are moving up-market when it comes to investable assets. Almost every firm is making a priority of increasing reps' productivity while reducing the absolute number of clients they must deal with face-to-face. On at least one level, this makes sense: The most profitable clients are those with the most money, and the economics of the business — high overhead, compression of fees — demands that Wall Street go after those who return the most. “It's a very narrow realm on which to concentrate, but a significant portion of the assets are in this market,” says Scott Slater, an analyst at the Spectrem Group, a Boston-based consultancy.

Indeed, from 1992 to 2001, the top tenth of the income distribution ladder has seen its net worth rise by a whopping 69 percent, according to the Federal Reserve. This group also owns more than half of the publicly held equities in the nation.

Bob Mulholland, head of Merrill Lynch's global private client group for the Americas, says Merrill is gunning for these clients more aggressively. “We're definitely moving more upscale,” he says.

Perhaps nowhere is this focus shift more evident than in the way Merrill is dealing with the other end of the spectrum — those with under $100,000 in assets. In general, these clients are being serviced over the phone, through Merrill's call center, rather than in face-to-face meetings with advisors. Over a million Merrill clients are now call-center material. This segmentation frees the firm's advisors to concentrate on wealthier clients — those in “roughly the $500,000 to $5 million-plus area,” says Mulholland.

Merrill is hardly alone in its approach; Morgan Stanley, UBS, Smith Barney and Wachovia are all moving up-river. The president of Wachovia's financial services group, Brand Meyer, said the firm now considers its sweet spot “a few hundred thousand dollars to several million,” and it, too, is experimenting with ways to service more clients through call centers.

HERE'S THE RUB

Trouble is, the supply of wealthy clients is insufficient to satisfy all the advisors chasing them. Some detail: There are 2.2 million U.S. individuals with more than $1 million in investable assets. Assuming every broker wants 150 million-dollar clients, there are only enough rich clients for about 15,000 brokers. That would leave more than 90 percent of the active registered reps out of the high-net-worth game. (There are an estimated 800,000 registered reps, roughly 250,000 of whom are active practitioners.)

One of the factors giving some urgency to the chase for these clients is rising costs at the firms. With new investors and products flooding the market in the last decade, financial advisors have migrated toward offering more comprehensive advice and planning services to clients. This extra work translated into better pay. According to the VIP Forum, a Washington-based group that advises firms on high-net-worth financial services, the average “relationship manager” saw his compensation rise to $92,000 in 2000-2001 from $65,500 in 1994-1995, a 40 percent increase. Meanwhile, over the last decade, fees collected on asset management have declined to 98 basis points from 1.03 percent, and the shrinkage is expected to continue.

With expenses heading up and revenue heading down, something has to give. In many cases, that “something” is the sort of service delivered to the less-than-rich client.

“I don't want to say you have to ignore the retail investor, but most of [industry] revenues are tied up in affluent accounts,” says Michael Kostoff, executive director of the VIP Forum. “Three-quarters of all non-qualified accounts are held by the affluent or high-net-worth clients.”

To help ensure reps concentrate on the right clients, firms are reducing, or eliminating altogether, payouts on transactions for smaller accounts. Not everyone is happy about this development. But other reps say the call center is the right place for smaller accounts, because advisors have such little time to devote to them that clients are actually likely to get better attention and advice from the call center.

Another strategy, embodied perhaps most successfully by the Total Merrill program, involves encouraging smaller accounts (and even large ones) to become more profitable by expanding their financial relationship with the firm. This is often accomplished with non-investment products, such as checking accounts and mortgages.

SMALL FISH STILL TASTY

As attractive as high-net-worth investors might be, some broker/ dealers — notably independents — relish the fact that larger brokerages are de-emphasizing clients in the lower reaches. “If you have $100,000, you don't want to tolerate something less than excellent service,” says Mark Goldberg, president of Royal Alliance, a unit of AIG with 3,000 independently affiliated reps. “It's a fabulous differentiator for us from the wirehouses.”

Prime among the clients targeted by independents are members of the “emerging affluent” — those with a couple of hundred thousand to invest. According to NFO WorldGroup, a Hartford-based consultancy, these people need advice, but they're not using financial advisors: About one-third consider friends or family members their primary advisor, while another 40 percent use accountants or other “non-traditional” channels for advice.

For all the evidence to the contrary, the major wirehouses have not totally given up on caring for smaller investors. Merrill, for example, has even taken steps that will allow some middle-market accounts to get more attention than they might have in the past. By modifying its advisor-team structure to share revenues on certain clients, Merrill has paved the way, for example, for a senior broker to send to a junior broker clients who aren't among his top 200.

Maybe, then, what we're seeing in the focus on wealthy clients is simply an honest reassessment of priorities. Perhaps Wall Street firms cannot possibly be all things to all people and should concentrate on being all things to some people — leaving others to do the same for smaller clients.
— A version of this article first appeared in Registered Rep. Nov. 2003

LIVING LARGE

Average assets-per-rep at the large firms ($ in millions)

Firm	Number of Reps	Assets-Per-Rep
Merrill Lynch	13,400	$88.4
Smith Barney	12,317	67.7
UBS Securities	8,284	58.9
Wachovia Securities	11,625	48.9
Morgan Stanley	11,326	48.0
A.G. Edwards	7,345	31.9
Edward Jones	9,304	30.4
Source: Company reports. Assets-per-broker figure is calculated by dividing total client assets by the number of company reps.

By David A. Gaffen, senior editor, Registered Rep., a Primedia publication