Now that the regulatory reform bill has passed, advisors and wealth managers are waiting to find out how it will effect them. They know there will be change, but just how much, and how it will affect them personally, is the big unknown. One thing seems clear though - advisors at large wirehouses and smaller broker-dealers will be the most impacted.

The winners: larger independent broker-dealers such as Edward Jones, Raymond James, and LPL Financial, which can compete against the big wirehouses, said Doug Dannemiller, senior analyst at Aite Group, in an interview Wednesday.

The challenge will be the cost of regulatory changes. Bank of America Corp. is the only firm so far that has come out and quantified the impact, Jeff Spears, the chief executive officer of Sanctuary Wealth Services in San Francisco, said in an interview. And the bill isn’t cheap: the components of regulatory reform that deal with overdraft, the CARD act, and the Durbin amendment are expected to reduce revenues by $4 billion, Bank of America said during its earnings call on July 16.

"We are still looking at ways to help mitigate the costs recognizing that we can't mitigate all of it," said Jerry Dubrowski, spokesman for Bank of America. "We have not been specific about how to do that as of yet."

Spears says he sees only two ways of offsetting costs: “by lowering the compensation of the advisor and raising the fees of the clients,” he said. “There’s going to be a lot of dislocation to make up for the $4 billion shortfall at BofA. And that will hold true for Wells Fargo and Citigroup and JP Morgan as well.”

Dubrowski says it's too early to speculate about what the bank's options will be. "But I would disagree with the suggestion that the only way to offset revenue reductions is to decrease advisor compensation. We have not discussed that at all in our plans."  

Dannemiller sees the 2,000 or so smaller broker-dealers struggling to keep up with the increased costs of regulatory change, while the bigger firms in the independent channel that can hold their own against the wirehouses benefitting.

Spears said that advisors who are unhappy with cutbacks at the wirehouse firms will move to some of those larger broker-dealers in the independent channel, where they can do a better job of servicing their clients.

“In the next three to five years there will be more assets under management in the indy channel than in the wirehouse and global management channel,” Spears said.

As of Dec. 31, assets under management in the wirehouse channel were approximately $4 trillion, he added. In the indy channel they were $800 billion to $1 trillion. “The only way you get there is by doubling or tripling the growth rate of the indy channel,” he said. “And the growth rate in the wirehouse channel will have to be negative.”

A negative growth rate in the wirehouse channel is not as far fetched as it may seem. In the independent channel many of the wealth managers are already registered as investment advisors, so the changes wrought by the financial reform bill will be minimal since most have already migrated toward a fee-for-service model and are fiduciaries, said Geoffrey Bobroff of Bobroff Consulting in East Greenwich, R.I.

But the impact on the wirehouse community of moving to a fee-for-service model would be significant. Wells Fargo along with a number of other firms have already been moving brokers to a fee-for-services model, which means brokers get paid less upfront and more over time. The regulatory reform bill will just accelerate the migration, said Bobroff.

“Meanwhile, financial intermediaries such as Fidelity and Schwab will migrate away and join the indy channel thereby shifting growth to that channel,” Bobroff said. “Clearly the wirehouse community prides itself on its wealth management oversight so I don’t think they’ll give up easily. It will be a battle.”

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