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May 7, 2007 9:51 pm

Loyalty to brokers ebbs as assets grow

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Most brokerage firms do not engender loyalty in their wealthy clients, according to a study.

The survey, conducted by Cogent Research, the Cambridge, Massachusetts-based market research firm, found only one-third of affluent investors are working with only one brokerage firm. By contrast, 35 per cent of investors are now working with two brokerage firms, and another 35 per cent have relationships with three or more brokerage firms.

It also found loyalty to a single firm weakens as investors’ wealth increases. While 39 per cent of investors with less than $500,000 in assets are loyal to only one firm, only 31 per cent of those with more than $500,000 have only one distributor relationship.

In fact, while only 30 per cent of investors with $100,000 to $500,000 in investable assets work with three or more brokerage firms, this figure increases to 38 per cent among those with $500,000 to $2m, and rises to almost half among those with more than $2m in assets.

The study, which looked at the investment attitudes and behaviours of 4,000 wealthy Americans, suggests the most important driver of investor loyalty is fees and expenses on investments. That is also the leading cause of terminated brokerage relationships.

Chris Brown, managing director of the wealth management practice at Cogent Research, says brokerage firms ought to focus more on improving communications in regard to investment fees “in order to help investors perceive greater value in what they’re purchasing”.

According to the study, investors with a single relationship are giving almost two-thirds of their investment dollars to their brokerage firm, while investors with multiple relationships give about half of their investment dollars to their primary firm, with the remaining dollars being split among other firms. Online brokerages are as vulnerable as full-service brokerages to these split loyalties, the study found. Online brokerages capture a smaller share of money among their investors even in those cases where they are the only provider.

Interestingly, the study found that while well-to-do investors are less likely to be loyal to any one firm, they are more likely to be loyal to their personal financial adviser. Of the 64 per cent of affluent investors who work with an adviser, 26 per cent said they would definitely follow that adviser to a new brokerage firm if he or she moved. Another 41 per cent said they would be highly likely to follow. Only 8 per cent said they would definitely stay with their current brokerage firm.

“This is good news for advisers – but not for the brokerage firms for which they work,” says Mr Brown. “Some firms are clearly more vulnerable than others; but all firms need to be working to keep advisers satisfied in the areas of compensation, product and service breadth, and home office support, or else [they] risk significant client defections.”

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