Everyone taking a huge step back resets the competitive clock. If you were on the defensive six months ago, it’s time to get aggressive and grab orphaned assets.
We knew the big names on Wall Street were having a terrible quarter and the earnings reports we’ve seen confirm where the wounds are deepest.
Morgan Stanley and Schwab both saw their client assets plunge 14% between December and March. Mighty BlackRock grimaced through a 13% decline.
Wells Fargo, JP Morgan, Goldman Sachs and AssetMark collectively lost several hundred billion dollars in AUM. Odds are extremely high that LPL and Envestnet will admit something similar soon.
From the top of the industry ladder, it looks like a catastrophe. But those of us who were closer to ground level see an opportunity.
Unsettled market weather only gets assets moving from the fragile and fossilized to more vibrant and relevant destinations. And if this is the start of a bigger shock to the system, that flow only gets more intense.
That’s not sentiment talking. It’s just the cold logic of scale.
After all, when trillion-dollar institutions bury their head in the sand to wait out the storm, they expose their weaknesses as well as their strengths.
It’s no wonder we’re hearing from quite a few industry players who see this as a perfect chance to market themselves, make a splash and stand up as the financial brands of the post-COVID area.
From their point of view, this isn’t the apocalypse at all. It’s a gold rush and the starting gun has already been fired.
Feast while the giants are frozen
The bigger the kitchen, the more cooks to get in each other’s way. That’s what I see in the wealth management landscape right now.
When everything is working, these institutions are intricate, powerful machines. They’re battleships. But the thing about a battleship is that it isn’t nimble.
You can’t turn a trillion-dollar bank fast. The easiest way to do it is to crash into something.
The banks and big brokerage groups were already reversing course as fast as they could to get out of the way of the Fed’s interest rate pivot. Here in a zero-rate world, they’re bleeding and vulnerable.
That’s when the sharks come to carve off tempting assets.
Look at Schwab and BlackRock. Six months ago, cutting commissions to zero gave them the chance to starve weaker competitors and feast on what was left behind.
Their business model depended on charging interest on trillions of dollars of client money. They could afford to grab that money by offering practically free trades and zero-fee funds.
But that was before the Fed kicked interest rates to zero. Suddenly the giants look a little less omnipotent.
Schwab, in particular, spent March running the highest-volume trading days in its history. Massive resources were deployed just to connect all the accounts . . . and yet transaction revenue went over a cliff.
The company isn’t bleeding money, but it isn’t making as much as it did a year ago, either. Momentum is no longer on its side.
Now is the time for new investment platforms to stretch their wings and compete with the giant head to head. Maybe they’ll ultimately hit a growth wall, but that’s for the future to worry about.
In the here and now, this is a chance to prospect Schwab investors while they’re off balance and unhappy. All clients are frustrated right now but this isn’t about perfection. It’s about flow.
You don’t have to have perfect client relationships and everyone singing your favorite song. You just need to have better relationships than weakened rivals.
Presumably Schwab’s clients will recover. When they do, they’ll once again be $500 billion richer and happy again.
Grab them when they’re disgruntled and you’ll ride the recovery with them. They’ll remember you as the person who made them whole.
And that $500 billion can do amazing things even when it’s split across a lot of small and hungry firms.
Efficiency versus inertia
You probably don’t have the drag of a big bank or legacy low-margin discount brokerage operation holding you back, either. The more efficient and the less encumbered by history you are, the harder every new dollar can work for you.
Bank of America pushed 700 Merrill Lynch advisors to the call center so they could process new emergency loan requests. That tells everyone where the priorities are there.
Furthermore, the big banks are draining capital into their reserves to prepare for big lending losses. While they aren’t burning cash, they aren’t using it effectively either.
Every dollar that goes into the vault isn’t available for marketing or even customer support. The giants just don’t have the resources they did six months ago.
Some like Wells Fargo are arguably wounded. Assets have gone down over the past year and an extended dormant period will only accelerate the decline.
For others, the challenge is really more psychological than institutional. It’s a problem of will when the wind blows against you.
The wind blew hard against all of us last quarter. It’s blowing hard now. But one day, it’s going to turn.
When it does, it’s time to get back to work. And since we all have nothing but time right now, now is the time to start moving into the future.
Remember, AUM goes up and down with the market cycle. Schwab is still 9% ahead of where it was a year ago, when the post-2018 rally was in the tentative phases.
Those conditions were survivable. They’re not down for the count. If they’re burying their head, that’s more a cultural problem than anything else.
Executives have a lot to lose. They don’t want to rock the world. They move slow. And when the battleships finally turn, their choices will help define the new industry landscape.
If you’re not piloting a battleship, this is your chance to seize the best strategic position while you can. Grab the assets. Capture the accounts.
Accumulate resources and momentum to close the gap. Maybe you’ll win big and become a giant yourself. This is the best chance you’ll have.
The advantage the giants have are size and inertia. Everyone else needs to rely on speed, inspiration and innovation.
You can do that, right? We’ve been talking every day to people who trust their inspiration and innovation enough to speed up when everyone else is paralyzed.
They’re talking to clients, prospecting aggressively, pushing big buttons to take their businesses to the next level. Getting their brands out there. Educating the industry.
When the world starts up again, they’ll be ahead of the pack. We’ll be talking about them a lot while the world remains stuck. Maybe you winners of the next cycle can learn from each other.