Expect the RIA channel to start aggressively promoting and expanding a “supermarket” of lending options for their clients, according to the bosses from Dynasty Financial Partners and Sanctuary Wealth.
The two RIA businesses want to attract breakaways from the wirehouses — Merrill Lynch, Morgan Stanley, and UBS — by convincing them that any loans their clients have can easily be replaced in the transition from wirehouse rep to RIA.
Wirehouse advisors increasingly have client loans tied to their wirehouse’s bank as reps are encouraged to get their clients to borrow money. The increased lending to clients offers dual advantages to the wirehouses: it both boosts their revenues and maximizes the stickiness of FAs’ clients to their institutions rather than to their advisors.
But prospective breakaways can overcome that stickiness much more effectively than many wirehouse FAs assume by mapping replacement lending solutions for clients prior to splitting from their old firms, Dynasty and Sanctuary claim.
“The reality is now, it’s very rare that we would find the lending scenario that we haven’t been able to match. We’ve had scenarios where we’ve had large wirehouse teams coming from private wealth management divisions in the wirehouse where they may have hundreds of millions of dollars in loans for clients and we’ve mapped them all, and seamlessly moved them over,” says Shirl Penney, CEO of St. Petersburg, Fla.-based RIA network Dynasty.
Scroll down to see interactive chart of wirehouse lending penetration
“I think it’s going to continue to make it easier and easier to go independent, when advisors have the ability to conduct the business that their clients need and that there are more choices, it’s easier to do. It’s less cumbersome and it’s less bureaucratic on the independent side. It will continue to encourage more advisors. I mean, success breeds success. The more large advisory teams map credit books over, the more that happens, the more others are going to be encouraged to do it,” Penney adds.
“You’re starting to see providers come to the table and offer a supermarket of solutions,” says Jim Dickson, CEO of Sanctuary. Dickson quit Merrill Lynch two years ago and since starting Sanctuary has acquired enough breakaway advisory teams from wirehhouses — including from his former employer — that Sanctuary’s assets under management have reached more than $9 billion. Sanctuary has added at least eight breakaway teams since June, primarily from Morgan Stanley and Merrill Lynch.
Loan transfers: Perception versus reality
The perception of wirehouse breakaways has not kept pace with the reality of what can happen to their clients’ borrowing if their FAs go independent, Dickson says.
“Their perception is that it’s a lot harder to do than what it really is,” Dickson says. “Once we walk through it and show them the historical success we’ve had — getting better rates and facility structures from various custodians than the wirehouses offered — then we move on."
But it’s certainly an extra conversation "or two,” he admits.
Wirehouses have encouraged FAs to believe the clients will never move if they have loans, he says.
In addition to RIA channel leaders, custodians too want to emphasize that they are widening the availability of lending options for independent FA clients. The giant discount brokerage and custodian Charles Schwab announced earlier this month it will make more lending products available to financial advisor clients, financial advisors and firms.
The company’s commitment to an effective bank build-out came as a pledge by a trio of Charles Schwab execs to an audience of more than 4,000 advisors attending the company’s annual conference in San Diego earlier this month.
The executives also acknowledged, while making that promise, that they are tardy in adopting more robust lending strategies and are now developing the products and services to better compete with the traditional major and independent broker-dealer companies — including Bank of America’s Merrill Lynch, Morgan Stanley, and UBS — all which have expanded aggressively their borrowing options and have historically lent to FAs.
“Traditional thinking is ’This is their spot,’” Bernie Clark, head of advisor services, told the audience, as previously reported in FA-IQ. Schwab initially didn’t jump into the lending space, conceded CEO and president Walt Bettinger. But now that’s changed, he said.
Opening the floodgates
Individual FAs who have bolted from wirehouses corroborate Penney and Dickson’s claims about the ease of moving client borrowings to the independent world.
“At first we thought it was going to be a challenge. Once we saw the options of what was out there, we realized quickly any challenges were easily overcome. We were not only able to match every loan rate but most clients got substantial cuts,” says Jonathan Trusty, whose firm Southern Oak Wealth Group is a partner with Sanctuary. Earlier this year, Trusty’s Nashville, Tenn.-based roughly $200 million AUM team moved from Merrill Lynch to independence.
Matt Celenza of Beverly Hills, Calif.-based Boulevard Family Wealth took his $1 billion team from Merrill Lynch to go independent and partner with Dynasty two years ago. His team shifted about $350 million of its clients’ borrowing to new lenders as part of the move.
“We figured out everything before we came,” Celenza recalls, noting that the loan prices they offered clients beat what Merrill Lynch’s parent BofA had been offering and, as a result, 100% of his clients moved. Celenza, whose prior experience includes long stints at then Citi-owned Smith Barney, has a background in customized and private equity lending, so, unlike many other FAs, he worried less about his clients’ loans when he made the move.
If the RIA channel competes effectively in offering clients all types of loans, such success will probably not curb the wirehouses' persistent push to get more lending revenues squeezed out of their wealth management units.
Morgan Stanley’s CEO James Gorman underlined his wirehouse’s zeal for lending in comments after the company’s third quarter earnings in October. “Continued growth of our loan portfolios are many exciting opportunities that remain in this business,” he told analysts.
Similarly, Bank of America’s CFO Paul Donofrio touted his firm's lending prowess after its earnings for the same quarter were released: “Average loans were 5% higher year to year, reflecting strong growth in mortgage and customer lending.”